Q&A with sovereign debt legend Lee Buchheit

Author: John Crabb | Published: 28 Mar 2019
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lee buchheit

Some lawyers make partner; some reach the top of their field. Few can claim to have shaped a practice area from the bottom up.

Earlier this year, legendary sovereign debt lawyer Lee Buchheit announced his retirement from the New York office of Cleary Gottlieb Steen & Hamilton. A stalwart in the international sovereign debt space, he leaves a gap that may never be filled.

A contributor to IFLR since the 1980s, in one article Buchheit predicted a debt crisis in Argentina a whole 10 years before it happened. He has been known to shift a country's debt markets by mere presence alone.

In the latest of our Q&A series, IFLR's John Crabb spoke to Buchheit about the highlights of an eventful career, the current situation in Venezuela and how the sovereign debt space can be improved.

IFLR would like to thank Lee for all of his contributions over the years, and wish him all the best for his retirement.

IFLR: You have chosen to retire after 43 years at Cleary Gottlieb – how does it feel to be moving on to the next chapter in your life after all this time?

LB: I have had a rewarding career with a wonderful firm, but there are a lot of other things to do. There are books to write and courses to teach, so the time is right to try something new.

IFLR: You had a long and eventful career. Looking back, what would you say is the achievement that you are most proud of?

LB: I elected early on in my career to focus on sovereign debt work. It was the early 80s, and there hadn't been a major sovereign debt – particularly a contagious sovereign debt crisis - since the 1930s. I therefore had the inestimable advantage of being present at the creation of a practice area. I decided very early on that I would concentrate on this field and I would try to make it my life's work. I have stuck with it now for the better part of four decades.

It has been professionally very rewarding. In many types of legal practice, the lawyers will do essentially the same tasks for different clients. My career has involved a series of representations of sovereigns in trouble all over the world, every one of them different financially and culturally. It has been a constantly refreshed intellectual exercise.

I hope that I have contributed during that period to the machinery by which these crises are addressed. If you compare the techniques that we now think of as quite standard to how things looked forty years ago, there is a world of difference. We as a community – not just the debtor side but the creditor side and the official sector too – have gotten much better at dealing with these crises. There will always be rogue situations, but they are becoming less frequent. 

In the period right after the Argentine default in 2001 Anne Krueger, the first deputy managing director of the IMF, gave a speech in which she introduced a sovereign debt restructuring mechanism – the SDRM – essentially a transnational bankruptcy code for sovereigns. The Americans weren't thrilled about that idea, and looked instead to a contractual provision that had been first introduced in 1879 in England called a majority action clause. We now call it a collective action clause. My friend and co-author Mitu Gulati and I wrote a paper in 2002 called Sovereign Bonds and the Collective Will, in which we researched that history.

The Americans sponsored the introduction of collective action clauses into sovereign bonds as a way of making the restructuring process more efficient. The clauses are now nearly ubiquitous in emerging market sovereign bonds.  

See also: An article from Lee in IFLR in April 1997 on Cross-default confusion

IFLR: Going back further still, when was the watershed moment when you knew that you wanted to focus your time on sovereign debt?

LB: I wouldn't say there was a single event. The firm was involved in Mexico, which was the first of the countries to get in trouble in August 1982. For the rest of that year and into 1983, country after country fell into the same process.

Because the firm had represented Mexico – it was very much the flagship restructurer – a number of those other countries called the firm, and I quickly realised this had the potential to be a standalone practice area. Emotionally, I more or less made up my mind at that point that this what I would try to concentrate on.

IFLR: You have worked on most of the major restructuring cases of the last few decades. For which one did you have the most hurdles to jump to get across the line? 

LB: Well, let me answer that another way. The most elegant workout was Uruguay 2003. Uruguay had been brought down by the Argentine crisis. They had a very competent group of people handling it from the government side, and managed to get their debt restructuring done very quickly. Uruguay returned to the market 31 days after the restructuring closed.

Probably the most challenging was Iraq in 2004. Saddam had been removed. The perception at the time was that there were two things that would retard Iraq's economic recovery. One was the security situation, the other was the miasmic cloud of debt that Saddam had accumulated over all those years. It turned out to be about $140 billion – that debt stock had to be reduced very significantly and quickly.

The political imperative was to streamline the techniques for resolving sovereign debt problems to the point that Iraq dealt with more sovereign debt more quickly than anyone ever has in history. If Iraq was the most interesting, Greece in 2011/12 was probably the most tense. Greece was a member of the European monetary union, so its fate was of course of enormous importance to the European integration project. 

See also: a 2010 IFLR article from Lee following the Greek debt crisis on Restructuring a nation’s debt

IFLR: How far has sovereign restructuring practice come since you started out?

LB: It has come a very long way. There is now something resembling a toolkit for sovereign debt restructuring. Exactly what tools you use will of course depend on the nature of the problem and on the official sector analysis of what needs to be done.

"There is now something resembling a toolkit for sovereign debt restructuring"

IFLR: What still needs to change?

LB: I fear that because of the way the Argentina saga ended after 15 years (which involved a generous recovery for the remaining bondholders) holdout creditor behavior in future sovereign debt workouts may be encouraged. This will put a burden on the architects of future debt restructurings to try to figure out ways to minimise the holdout creditor problem. For 40 years this has been the Great Game.  

IFLR: You have been linked to an advisory position with National Assembly leader Juan Guaido in Venezuela, is there any truth behind the rumours? 

LB: That report was premature. The Guaido team has not asked me to assist them.

Mr. Maduro has got to leave before the debt restructuring process can start.

IFLR: How would you go about handling the restructuring situation there if you did work with Guaido in some capacity? 

LB: My instinct is always to simplify. Venezuela, like Iraq, has a very diverse debt stock; unusually diverse. In the 80s we dealt exclusively with commercial banks. In the last 25 years most sovereign debt workouts have involved exclusively bonds. Venezuela has bonds, promissory notes, unpaid supplies, arbitration awards and several other categories of creditors. It is an extraordinarily diverse debt stock.

Confronted with that level of diversity, it has always been my view that it is a fatal mistake to try to customise the restructuring terms to each of those many components of the debt stock. Each type of creditor will view the others with suspicion and jealousy. In Iraq, six or seven separate creditor committees were formed.

Iraq talked to all these groups, but formally 'negotiated' with none of them.

I would also encourage the authorities to clean out the Augean stables as much as possible. That is, resolve as many outstanding claims as possible.

IFLR: The situation there is obviously untenable in the long run, what do you think the best solution and outcome is for the country and its people?

LB: First, that Maduro leaves sooner rather than later. Second, that the next government be one that is acceptable to the international community. If those two things happen I have every reason to think that the official sector (IMF, IDB, World Bank, US Treasury, etc.) will be very generous in putting money into the country to arrest the humanitarian crisis, quickly followed by money to refurbish the oil sector.

In Venezuela the oil sector is the economy, and I would expect to see very substantial inflows to that sector. The official sector will not want to see that money bleed out to pay what they will call legacy creditors of the Chavez-Maduro era. The architects of the debt restructuring will therefore be encouraged to conclude a very complicated debt restructuring as soon as possible. In this sense, it may look more like Iraq than any of the other situations that we have dealt with in the last 25 years.

See also: Lee on the financial crisis in 2008: We made it too complicated

IFLR: Closer to home, what do you think about the Trump administration and its foreign policy?

LB: I certainly agree with the Trump administration's policy on Venezuela. The fact that we have such a humanitarian crisis and refugee crisis in this century and in this hemisphere is something that really shouldn't happen. I think it is rather refreshing that the US government at the moment is holding hands with most of the Latin American countries on its policy toward Venezuela.

"it is rather refreshing that the US government at the moment is holding hands with most of the Latin American countries on its policy toward Venezuela"

IFLR: What about on the financial side?

LB: We should all realise that we are coming off a period of 10 years in which financial conditions for emerging market sovereign debtors have been unusually benign – zero percent interest rates, very high commodity prices and massive lashings of quantitative easing. This puts a tidal wave of money into the market that has got to find a home. Emerging market sovereigns and corporates have been the beneficiaries of those broader trends.

The trends are gradually reversing however, and many of these countries borrowed money in the sunny times with bullet maturities. They took a gamble that when those bonds mature they will continue to have access to the capital markets at a tolerable interest rate. I am afraid the next 10 years may not be as benign, and that some of these countries will find that when their existing debt matures, the markets are not as munificent as they have been for the last decade.

IFLR: What advice would you offer to young lawyers looking to follow in your footsteps?

LB: A legal career can span three or four decades. At the moment in your career when you actually become competent to do something, at that very moment, its intellectual interest may begin to leach out.

The challenge for many lawyers is how, over a career of three or four decades, can you keep a constantly refreshed intellectual interest in what you are doing? My advice to a young lawyer would be this: at some point in the first 10 years of your career, you will come across a type of practice that you realise holds the prospect of continually refreshed intellectual interest.

I also worry that younger lawyers will be forced into specialisation too early in their careers. I started out doing litigation. I got sent to London and had to do euro-dollar financial work. You don't really realise as a young lawyer that senior lawyers in different practice areas think about problems very differently.

But I fear that the trend in the profession is to the contrary. 

One of Buchheit's first articles for IFLR, January 1992
IFLR: How can that be remedied?

LB: The senior lawyers should give the speech that I was given: don't specialise too early.

In the end, every lawyer is a patchwork of the techniques, habits, even ways of speaking that they will have picked up from the senior lawyers with whom they have worked over the years. For example, so-and-so writes beautifully; I would like to learn that art. So-and-so has a wonderful bedside manner with the clients; I should absorb that. Over the course of the years those little patches stick. At some point in your career you are no longer able to recognise the provenance of any one of them. Exposure to different areas of practice is, in my view, very healthy.

IFLR: Any regrets?

LB: Some individual regrets; inevitably you make mistakes. You tell a client to move left when in retrospect they should have moved right. You are constantly second-guessing yourself. Ought I to have been more aggressive? Ought I to have been more accommodating? Did I gratuitously offend someone on the other side of the table when I didn't intend to? But on the whole I have been remarkably fortunate in my choice of a profession, in my choice of a firm, and in my choice of a practice area.

IFLR: You have been writing for us for more than 30 years. What is your favourite article that you wrote for us, and why?

LB: It was entitled 'Deja vu all over again' and appeared in the January 1992 issue of IFLR. The sovereign debt crisis began in August 1982, and in 1992 your editors decided to do a 10th anniversary issue covering the first decade of debt crises. I wrote a piece in which I tried to predict what a sovereign debt crisis would look like 10 years later – in 2002. I wrote a story in which a finance minister of Ruritania comes into his lawyer's office in August 2002 and says 'Ruritania is back in trouble'.  

After IFLR published it I got a phone call from one of my partners who dealt with Argentina telling me that 'the Argentines are furious with you again'. Apparently they had read this piece and thought I was predicting another default by Argentina in ten years. In truth, I did not have Argentina in mind when I wrote the article.

I was told the Argentines were angry because “everyone knows that Argentina will never have another debt crisis”. Argentina defaulted again in December 2001.

See also: The pari passu fallacy - requiescat in pace