Sovereign Debt Restructuring Complexities--Odious Debt, Sanctions, and Creative Solutions

Key Quotes

"The bonds that we're talking about are principally Republic of Venezuela and PDVSA bonds, roughly split 50/50. They were issued during the Chavez and early Maduro periods. They went into default, all of them, in the fall of 2017. You remember Mr. Trump in his first term imposed sanctions on Venezuela in August of 2017. The response was to have the bonds go into default, and they have remained in default since then."

Lee Buchheit explains that Venezuela's defaulted bonds, issued under Chavez and early Maduro, went into default in 2017 following US sanctions. Buchheit notes that these bonds, along with those from PDVSA, represent a significant portion of Venezuela's debt and have remained in default since that time.

"One of the difficulties that Venezuela will face in restructuring its debt stock is that there are all kinds of other liabilities that are not in the form of bonds. So there are unpaid trade creditors, there are holders of arbitration awards, chunky arbitration awards, there are people with blocked deposits in Venezuela. And so the restructuring, when and if it comes, will not be the simple homogeneous kind of restructuring that we're used to where there are bonds or in the old days bank loans. This is going to be a much more diverse creditor group."

Lee Buchheit highlights that a Venezuelan debt restructuring will be complex due to liabilities beyond traditional bonds. Buchheit points out that unpaid trade creditors, arbitration award holders, and those with blocked deposits represent a diverse group of claimants. This diversity, Buchheit explains, means the restructuring will not be a straightforward process like those involving only bonds or bank loans.

"The exception, there are very limited exceptions to that. One of them, there was first talked about in the early part of the 20th century, was odious debts. And its original formulation, that meant a debt incurred by a dictatorial regime where the proceeds were not used for the benefit of the citizenry of the debtor country, and where the creditor knew or should have known that the dictator was going to steal the money. So it was a pretty narrow category."

Lee Buchheit discusses the doctrine of "odious debts," explaining its narrow historical definition. Buchheit clarifies that this doctrine applies to debts incurred by a dictatorial regime, where the funds were not used for the public's benefit and the creditor was aware of potential misuse. Buchheit emphasizes that this was a very specific and limited category in international law.

"The Bush team really wanted that experiment to succeed. They wanted a stable, democratic Iraq right in the middle of the Middle East, someone that would support Israel when that became necessary. They wanted a bulwark against Iran. And they really wanted it to succeed. And their perception at the time, this is now 2003, 4, was that this miasmic cloud of debt that Saddam had accumulated and ceased paying, by the way, in 1990 when the Security Council put sanctions on him, that debt stock would effectively keep anyone from investing in Iraq, lending it money, and so forth."

Lee Buchheit explains the US government's motivation for restructuring Iraq's debt following the 2003 invasion. Buchheit states that the Bush administration sought a stable, democratic Iraq as a strategic ally and viewed the accumulated debt as a significant impediment to economic recovery and investment. Buchheit notes that this debt had been in default since 1990 due to UN sanctions.

"No, the claim is the claim. Where it is relevant, Joe, is in the negotiation of the debt. If I sit across from someone who paid 10 cents for their claim and I offer them 20 cents, I'm a hero. But if I sit across from, in the old days, a banker who lent 100 cents and I offer him 20 cents, I'm a heel. And so it plays into the negotiation in that sense."

Lee Buchheit addresses whether the composition of the creditor group impacts sovereign debt restructuring. Buchheit asserts that the legal claim itself remains the same regardless of who holds it. However, Buchheit explains that the identity of the creditors, specifically whether they are distressed debt investors or original lenders, significantly influences the negotiation dynamics and perceptions of fairness.

"I don't think they can stay in default indefinitely, but there is no starting gun. As a matter of fact, what has prevented a restructuring of Venezuela's debt since 2017 has been the sanctions imposed by the US government. Oh, yeah. This is funny. So you can't even sit down and begin to talk about a restructuring because you'd be in violation of sanctions."

Lee Buchheit explains that while Venezuela cannot remain in default indefinitely, there is no automatic trigger for restructuring negotiations. Buchheit identifies US sanctions, imposed since 2017, as the primary obstacle preventing any discussions about debt restructuring. Buchheit points out the irony that these sanctions make it legally impossible to even begin the process of negotiation.