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Freitag, 11. August 2017

Already, there are rumors of a deal where holders of Venezuelan bonds will be offered a swap; in exchange for granting the Maduro administration short-term debt relief, investors will get a new set of bonds (Maduro bonds), with more favorable terms for later payment.

By Mitu Gulati

Showing an admirable love of alliteration, President Trump announced on July 17 that retaliation would be “strong and swift” if President Nicolas Maduro of Venezuela conducted an election for a new Constituent Assembly. The reason for creating this new legislative body was to replace the existing National Assembly, which was refusing to do the bidding of the Maduro administration.

President Maduro went ahead with the election and the US response was swift but not particularly strong. The day after the election, US officials issued a number of statements condemning President Maduro’s actions, but the sanctions that followed – personal sanctions on President Maduro – were wimpy.

A question on the table is whether the Maduro administration now has carte blanche to push through deals, with the approval of its new Constituent Assembly, that the National Assembly would not have approved. Already, there are rumors of a deal where holders of Venezuelan bonds will be offered a swap; in exchange for granting the Maduro administration short-term debt relief, investors will get a new set of bonds (Maduro bonds), with more favorable terms for later payment.

Why would any investor would want to do such a deal, when it knows that a successor administration will probably want to repudiate the deal? The answer lies in international law: the rule of governmental succession. Successor governments are bound by the agreements of their predecessors, differences in political philosophies notwithstanding.

Yet legal rules have exceptions. Below are two lines of attack that a holder of Maduro bonds might face in the future.

1. Misbehaving Agent

Imagine you made a loan to a company. Would a court help you get repaid if you made the loan through an agent who you knew was not authorized to conduct such transactions for the company? Or if you transacted with a company representative who you knew planned to steal the funds? Agency law says no.

Along those lines, a post-Maduro government could argue that the Maduro bonds were not properly authorized by a representative body, claiming that authorization by the pro-Maduro Constituent Assembly was obviously inadequate, and that investors would have known that.

Relevant to the judge might be the statements made by US officials in response to the election of the Constituent Assembly. President Trump said: “Maduro is not just a bad leader, he is a dictator.” Treasury Secretary Mnuchin called the election of the Constituent Assembly “illegitimate” and in “disregard [of the] will of the people”. UN Ambassador Haley, tweeted “Maduro’s sham election is another step toward dictatorship” and “we won’t accept an illegit govt”. Similar pronouncements are readily available from senior officials for the EU, the Vatican, the UK, Argentina, Paraguay, Brazil and so on.

Put all that together and a judge could find that the holders of Maduro bonds must have known that they were transacting with an unrepresentative or illegitimate agent of the people.

And things could get worse. Agency law goes beyond merely voiding the contract between the principal and the third party; a third party who suborns a betrayal of trust by the agent may be answerable in tort to the principal.

The negotiations between Spain and the US after the Spanish-American war of 1898 provide an analogy. Spain, having lost and ceded Cuba to the US, argued that Spanish debts backed by Cuban revenue streams were now those of the US – citing the rule that along with a transfer of sovereignty came the transfer of sovereign obligations. The Americans rejected this claim on three grounds:

First, the loans had not been contracted for the benefit of Cuba; indeed, a portion of the proceeds had been spent to suppress rebellions in the island. Second, the Cuban people had not consented to the debts; they had been imposed by Spain. Finally, the creditors knew that the pledges of Cuban revenues had been given in the context of efforts to suppress freedom struggle. Creditors therefore, to quote a leading treatise of the time, “took the obvious chances of their investment on so precarious a security”.

The foregoing argument is strong on the facts – the agents here are obviously misbehaving and everyone knows it. The weakness is in the law. While courts readily accept the argument that a CEO is an agent of the company, with legal obligations that third parties should know about, it is less clear that they will be willing to view the relationship between a government and its people in that fashion. That said, international law in the post World War II era has been moving more and more in this direction.

2. Unauthorized Transaction

A related, but different approach might argue that the Maduro bonds are void because they were issued in violation of Venezuelan law; specifically, the need for National Assembly approval that is specified in current law. Unlike the agency argument that has good facts, but could use stronger law, this second argument is strong on the law but might need better facts.

US law dating back to the 19th century says that municipal obligations issued in violation of law are void. The courts will not even allow investors to collect based on equitable principles.

The facts, however, may be weak. The Maduro bonds will presumably be issued in compliance with future Venezuelan law as such law shall have been promulgated by the Constituent Assembly. It is the Constituent Assembly itself and all of its works that the post-Maduro government must argue are unauthorized, invalid and illegitimate. And the longer that the Constituent Assembly stays in power, and makes the laws of the country, the more it begins to look like the real legislature.

Bottom line: While neither of the foregoing arguments is a slam dunk, Maduro bonds will come with a real risk of repudiation. How many investors will be willing to take it? And if there are none, maybe, just maybe, Mr Maduro will have to rethink getting rid of the National Assembly.

Mitu Gulati is a law professor at Duke University and has written recently on the question of How to Restructure Venezuelan Debt.

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