di Mitu Gulati e Ugo Panizza
An age-old question in international finance is that of what happens to a despotic government’s debts when the despots are vanquished and the good guys take over. Do the good guys have to pay the debts of the despots? There are both moral and economic arguments for why they should not. Among other things, making it harder for creditors to collect on loans to despots should make them less inclined to support those despots in the first place. International law though has stubbornly resisted calls for establishing an odious debt doctrine, for over a century now. The law is strict: governments inherit the debts of prior governments, regardless of their nature.
However, Ricardo Hausmann, a professor at Harvard’s Kennedy School, may have produced a chink in the armor. In an Op Ed for Project Syndicate, he argued that investing in Venezuelan bonds was causing immense harm to the Venezuelan people, because it was helping finance a despotic regime that was privileging the repayment of bondholders over the welfare of its people. He advocated that JP Morgan (JPM) remove Venezuela from the emerging markets index (the EMBI+) so as to make Venezuelan bonds less attractive to the markets.
Unbeknownst to Hausmann, two days prior, on May 23, 2017, the asset management arm of Goldman Sachs (GSAM) had purchased $2.8 billion in bonds of the Venezuelan state-owned oil company, PDVSA. GSAM paid 31 cents on the dollar, for a total disbursement of about $865 million. Almost simultaneously, Venezuela’s international reserves increased by about $750 million.
Putting two and two together, a series of press articles conjectured that GSAM’s bond purchase looked to be providing direct funding to the Venezuelan government, flying in the face of Hausmann’s plea for the government to be starved of capital. Adding fuel to the fire, GSAM appeared to have purchased its bonds at a price that was 25 percent below what other similarly situated PDVSA bonds were trading at. Hausmann appeared on CNN to talk about the “Hunger Bond” purchase and what he saw as “morally indefensible” behavior by GSAM. US Senator Marco Rubio tweeted “Today we learn that @GoldmanSachs just gave the Maduro regime in #Venezuela a $2.8 billion lifeline.” By then, protests had broken out outside GSAM’s office in New York, with many using “Hunger Bonds” on their placards. The term Hunger Bond became indelibly associated with the single issuance that GSAM had purchased on May 23, 2017.
That was just the tip of the iceberg. Institutional investors became scared that protesters would show up at their offices if they were seen as supporting the GSAM purchase, so they avoided it. Simultaneously, a number of big broker-dealers such as Credit Suisse announced that they would not be making a market for this bond.
Things got worse for the Hunger Bond when investors, perhaps concerned that something really was wrong with this bond, began asking their lawyers whether there were matters hidden within the bond terms that they should be aware of. The lawyers, when they looked, found an issue buried in a couple of obscure bankruptcy cases – known as the Original Issue Discount or OID issue.[1] In this case, if this kind of OID claim were somehow to be recognized in the sovereign context and GSAM was determined to be the original purchaser (something they will strenuously deny), GSAM’s principal amount would become $865 million instead of the purported $2.8 billion.
Last but not least, JPM, which had rejected Hausmann’s original request to exclude Venezuela’s sovereign bonds from the EMBI+ index, eventually excluded the bond. Hausmann had originally hoped that getting JPM to exclude Venezuelan bonds from the index would make those bonds less attractive to the large investors who marked their positions in comparison to the index, thereby drying up the market for these bonds. JPM did not react specifically to Hausmann’s request, presumably because neither the views of a Harvard professor nor human rights considerations were part of its criteria for what did or did not go into the index. But what was part of JPM’s criteria was whether there was a meaningful market in the bond; and, thanks to the Hausmann Op Ed, there wasn’t one. So, it got excluded. And because it was excluded, the big investors felt little pressure to go near it, even if it would have been a good buy.
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