Charles Blitzer, an economist, former senior IMF staffer, and expert on sovereign debt management and restructuring, says that talks between Argentina and its holdouts should start with signing a non-disclosure agreement.
After more than a decade, representatives of Argentina and its creditors are finally sitting down in an attempt to negotiate a settlement to the long-running sovereign debt dispute.
Early comments from Argentina’s new president Mauricio Macri are encouraging:
We don’t want to remain listed as a defaulter; we want to resolve all outstanding issues. Even though things haven’t been done well in the past there’s now a change.
The creditors, which include numerous institutional holders led by Elliott Management and also individual pensioners, have long stated a willingness to reach a resolution.
But now, according to press reports, the talks are in danger of an early derailment because of Argentina’s puzzling reluctance to keep the talks confidential.
Both sides gain from a quick and successful outcome. The creditors hold Argentine bonds which have been in default for fourteen years and a settlement will mean getting a return on their investment. A resolution would give Argentina unfettered access to international markets, a necessary condition to bring down real interest rates which would not only improve public finances but also contribute to increased private investment including foreign direct investment.
I have personally taken part in a number of sovereign debt restructurings and have observed first-hand that one of the best predictors of success is creating a structure and environment that allows the parties, and their advisors, to operate in good faith.
As with any negotiation, an essential first step before getting to the brass tacks of discussing economic and legal terms of a settlement must be to mutually agree on the ground rules, or code of conduct, governing the discussions.
The most widely utilized guidelines for negotiations between sovereign debtors and creditors are the Principles for Stable Capital Flows and Fair Debt Restructuring, a voluntary code of conduct drafted by issuers and market participants. Key elements of the Principles, which are endorsed by the G20, include: good faith by both sides, data and policy transparency within the discussions, and fair treatment (avoidance of discrimination) of all creditors. Similar principles have been endorsed by the IMF and the UN General assembly.
In the past 10 years there have been more than a dozen successful sovereign debt restructurings. A defining factor of successful negotiations is that they were conducted in confidence that the proposals made by each side would be treated confidentially and with all public statements mutually discussed before their release. This was the case for the debt restructurings of Greece, Ukraine, Belize and Grenada, to name a few. This is typically agreed to in the form of a non-disclosure agreement (NDA).
The need for confidentiality is obvious as it is impossible to have the necessary give-and-take in the public spotlight, with the fear of press leaks or attacks from political opponents. The use of an NDA is essential in this circumstance, as the Argentina dispute has been highly charged, laden with mistrust, and scrutinized by the international press.
Notwithstanding the best-practice of confidentiality agreements, Argentine authorities have announced that they intend to release to the public a settlement which they intend to propose in the near future. And press reports indicate that the Argentine authorities informed the creditors at their meeting last week of their intention to release any proposals tabled by the creditors during the negotiations.
The government claims it is doing this in the spirit of “transparency.” And while that may be well-intentioned, such a course will make it nearly impossible to have constructive negotiations. There’s a reason the Vatican waits for the white smoke before announcing a new pope.
The approach is also inconsistent with recent financial negotiations conducted by the Macri administration, including a multi-billion dollar loan from international banks and the restructuring of foreign exchange contracts which have been conducted confidentially. Attempting to conduct the negotiations largely in public would greatly raise the risks of inflexibility and needlessly delay a settlement, to the detriment of all.
But smart policy needs to start with a smart negotiation strategy. There is a clear roadmap to conducting successful debt restructuring. Both Argentina and the creditors should agree to the key elements of the Principles, sign and honor an NDA, put experienced negotiators in the room, and empower them to make a deal. And then – and only then – send up the white smoke.