Another Politician Sinks Bond Markets by Bumbling Default Lingo
(Bloomberg) -- Restructuring.
It’s the word that lurks in the nightmares of every bond investor, and should only be used by governments in case of emergency. So it’s a bit surprising that hapless policy makers keep saying it by mistake.
The latest contributor in the long history of these gaffes is Lebanon, whose caretaker Finance Minister Ali Hasan Khalil floated the possibility of a debt restructuring in an interview last week. The consequences for the market were predictable -- dollar bonds maturing this year tumbled, pushing yields to more than 19 percent.
Khalil later said fiscal reform may involve rescheduling debt, not restructuring it, before reading a joint statement with President Michel Aoun that reassured investors the country’s bonds and deposits would be paid on maturity.
“The stigma will remain in the form of a more pessimistic view on Lebanon’s finances," said Magdalena Polan, global emerging-market analyst at Legal & General in London and a former IMF economist who worked on debt restructuring cases. "Just the comments themselves can lead to a negative spiral.”
The remark was particularly unfortunate for Lebanon because the country’s economy is in turmoil, with many speculating its debt load is on an unsustainable path. A web of linkages between the nation’s central bank, government and domestic lenders complicate the 65 percent bond write-off that Goldman Sachs Group Inc. sees as necessary to achieve sustainable public finances.
But the unfortunate Mr. Khalil is in good company, as the following list illustrates.
Lost in Translation
Belarus’s dollar bonds lost a quarter of their value in a matter of hours in January 2015 after long-serving President Alexander Lukashenko talked about a potential debt restructuring.
"Please calm down," he later told bondholders after clarifying at the same seven-hour-long press briefing he had meant to signal a "refinancing of debt." But the damage was done. It took two weeks for the bonds to fully recover, and the nation stayed away from international markets for more than two years.
Mariano Arcioni, governor of the Argentine province of Chubut, said last year he would seek to negotiate better terms for its debt. The province’s Economy Minister Pablo Oca later clarified the intentions. Governor Arcioni meant to say refinancing, not restructuring, he said.
The episode was especially troubling as it came less than two years after Argentina’s jubilant return to international bond markets. The region’s bonds went on to almost double their yield within eight months, and the government had to bail out the province with a $37 million loan.
On other occasions, politicians will go a bit too far in extricating themselves from undeliverable campaign promises to voters. It’s the famous "the treasury is empty" stunt.
Fresh from a landslide election victory in 2010, Hungary backtracked on its populist pledges, ranging from tax cuts to jump-starting growth only two years after the country was forced to take the first IMF bailout of the financial crisis in Europe. Lajos Kosa, a senior lawmaker said Hungary had a "very slim" chance of avoiding a Greece-like fiscal crisis, then the government spokesman said the previous cabinet had manipulated data and lied about the state of the economy.
A day later, with a currency almost 6 percent weaker, an official stepped in to calm investors calling the comments on possible default "unfortunate."
And other times politicians will simply defy all logic. Like Venezuela’s Nicolas Maduro, who in November 2017 called for a debt restructuring, refinancing and continued bond payments all in one speech.
"I decree a refinancing and restructuring of external debt and all Venezuelan payments," the president said in a televised address, simultaneously emphasizing the nation’s history of honoring obligations to foreign creditors. "We’re going to a complete reformatting. To find an equilibrium, and to cover the necessities of the country, the investments of the country."
Fourteen months later, Venezuela is almost $10 billion in the hole to investors.
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