Caribbean Debt Restructuring and Climate Finance
A discussion with Thomas Laryea on The Rasheed Griffith Show
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Show notes
On this episode of the show, Rasheed is joined by international lawyer Thomas Laryea, who specializes in the mediation process for sovereign debt restructuring. As a senior lawyer with the IMF, Thomas holds a unique vantage point at the tables of the negotiation between state debtors and creditors when financial instability requires a reevaluation of ongoing agreements.
The Caribbean is no stranger to Laryea's field, with several members having undergone their own restructuring processes. Of particular note is Suriname's own recent restructuring, which came under scrutiny in the public eye for it's long-winded execution and apparent delays brought about by the largest creditor, China. Thomas explores the intricacies of of the negotiation process, an outlines factors that could lead to the perception of overdrawn negotiations.
What makes a good or bad deal? There's no one size-fits all for restructuring. Sovereign debt restructuring is handled case-by-case. Dynamic solutions must be brought to the table to bring each party as close as possible to their perceived conditions for a win. The negotiations must also account for future investment opportunities and ideally provide new vehicles for additional financing in the long term.
Climate change poses a significant threat to the Caribbean region with many territories lacking the necessary financing to implement infrastructural and policy changes needed to weather the upcoming crises. Here, Thomas offers advice for governments seeking funding solutions across both private and public liquidity pools. The climate conundrum will be a broad challenge for small island states, and broad solutions will therefore be required to meet that challenge.Â
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Full Transcript
This transcript was automatically generated by AI and lightly edited by our team. We don’t catch every error, so if you spot one, send us a message/email via shem@cpsi.org.
Thomas: The analysis should not be - "Okay, let's see what's the most relief I can get." That is not a good long term outcome for a borrowing country. You may get a lot of upfront relief, but if that affects your relationships with your sources of financing so that future financing will be constrained to be at a higher cost. So you would shoot yourself in the foot and not have spontaneous market access going forward.
Rasheed: Hi everyone. And welcome back to the show. The issue of small economy debt seems to be intensifying in the last few years. With everyone from the prime minister, Mottley of Barbados to President Macron of France, trying to argue that the international financial architecture is ill suited for the problems that small economies face in the modern globalized world. To essentially fix this problem, there have been discussions on new methods of sovereign debt restructuring and also new methods of climate finance. That is the general more common term we see these days in the news. But what exactly can be done to increase climate finance in realistic ways, and not in these more esoteric performance are ways that we typically hear it in the news?
And also, how does the idea of properly assessing correct methods of sovereign debt restructuring play into this general question of new climate finance options? These are very important questions that continually arise in any discussion of economic growth in small open economies. And to discuss these today, I am joined by Thomas Laryea, who is counsel at Orrick, Herrington and Sutcliffe. And also a former assistant general counsel at the International Monetary Fund. He is a world renowned expert on these issues and it's really great to dive into these topics with Thomas today. So, I hope you enjoy our conversation.
Hi, Thomas. And thank you so much for joining me on the podcast today.
Thomas: Thank you, Rasheed. It's a pleasure to be here.
Rasheed: This idea of debt restructuring is obviously always a very hot topic when issues come up across the world. In the Caribbean recently, a lot of conversation has been focused on Suriname, in particular for its proposed contentious negotiations that recently concluded.
And there was always a special reference to China as in Chinese creditors were in some ways according to media "holding up negotiations" with Suriname". Is that an accurate framing of how the Suriname negotiations were contentious? And if not, what actually happened with Suriname negotiations?
Thomas: Okay. So I'm happy to address that question.
I should have started with disclaimer that my law firm, Orrick, Herrington & Sutcliffe represented the bondholders in the Suriname debt restructuring, we may have a particular perspective, but I hear your question has focused on sovereign debt restructuring, not a corporate or other types. And so in the sovereign debt restructuring space, there have been a number of recent developments and Suriname's debt restructuring is one case, which did get a lot of attention.
I'm not sure it got a lot of attention because the process was very, particularly contentious. It was a complicated case in the sense that the country was clearly going through significant economic imbalances. They'd had years of economic mismanagement that was exacerbated by COVID. But on the other hand, they had, and still have very strong prospects due to the oil and gas finds offshore. So it was challenging to go through a debt restructuring process in the context where the country needed short term relief, but the bondholders, in our view, were entitled to the upside or some of the upside from the high prospects that the government has through the oil and gas developments.
So it took some time for the government to internalize that they needed to essentially give back the relief in years to come. And that did complicate the negotiation. The IMF in its own debt sustainability analysis, didn't include the potential upside for non oil and gas in its baseline scenario. So we had to essentially negotiate as if that prospect didn't exist.
But recognize it through what we call a value recovery instrument. So it took some time. Now you allude to China. Now China, of course, is a official bilateral creditor. So there was in parallel to the restructuring of the commercial claims, including bondholders, there was a restructuring of Suriname's official bilateral claims.
These are claims by other governments and China was the main creditor in that parallel restructuring process. And the reason why that restructuring had a sort of a collateral effect is because of the IMF's own rules around governments needing to provide financing assurances in the context of the IMF financing program.
And yes, you are correct that the financing assurances from China and the progress in relation to the restructuring of China's claims did take a long time. In fact, as I sit here now, I'm not even sure that they have been concluded, but the time that it took extended the wait period that the IMF went through in order to conclude its own financing.
And it did have an effect on the IMF's timing of its reviews. But notwithstanding that, we did get through the process. And as you alluded to, we had a successful restructuring last year, at least on the bondholder side.
Rasheed: So why has it taken so long to get a decision on the Chinese side regarding the financial insurance of the bilateral creditors?
Thomas: I don't want to speak for the Chinese, but there's some geopolitical and then there's some policy issues. So let me start with the policy side and I'll move back to the geopolitical side. So on the policy side, interestingly, the IMF last week announced or two weeks ago announced a new policy on how it establishes financing assurances from official bilateral predecessors.
There was a sense that the IMF approach was too cumbersome and was too formalistic and giving essentially a veto to countries who are not happy with the process. And so then that begs the question as to why might China not be happy with the process of providing new relief to Suriname. And again, this is conjecture on my part, because I can't speak for the Chinese authorities, but you can see some geopolitics at play, and one element of the geopolitics is Suriname, a country in the Western Hemisphere, and the U.S., of course, has strong interests in Western Hemisphere countries, and Suriname had received quite a lot of financing from China. And so there was some optic of China being eased out of a Western Hemisphere country just at the time when, as I say, the economic prospects may be looking up. And so I can understand some resistance from the Chinese authorities about the optics and the outcome of that restructuring.
Also, frankly, the rules that are associated with obtaining financial assurances on the IMF side are not rules that necessarily the Chinese were very focused on historically. Now we're seeing them be more engaged and frankly questioning why the rules were constructed in a particular way and why China as the largest official bilateral creditor shouldn't have more of a say both in the process and in the outcome.
Those are some of the factors at play in the Suriname situation.
Rasheed: I had a previous episode where I discussed. Some restructuring details. With a only finance side with Federico Sequeda, who we both know in common.
Thomas: Yes, indeed.
Rasheed: And one of his points was that debt negotiations are not particularly standardized. It's a very case by case basis. And there are some outcomes that make the creditors more likely to invest in the future of the country after the restructuring has been completed. So I'm curious from your perspective, what does a outcome look like where are the creditors are likely more willing to invest in the future of the country? And also what would be a bad outcome in the conclusion of a debt negotiation?
Thomas: That's a really important question. So I sometimes represent borrowing countries. Sometimes I represent bondholders and there are a couple of points that I always make an emphasis that these are negotiated solutions and both sides want to get to a solution that is as far as possible a win and so for the borrowing country, the analysis should not be -"Okay let's see what's the most relief I can get. Now, how much could I, excuse my French, screw my creditors in this process?" That is not a good long term outcome for a borrowing country. You may get a lot of upfront relief, but if that affects your relationships with your sources of financing, so that future financing will be constrained to be at a higher cost, so you would shoot yourself in the foot and not have spontaneous market access going forward; then you are constraining your own development financing objectives through this one time debt restructuring. And frankly, I have to say that Suriname started off, I think, with the wrong perspective. If you look. back at the initial proposals that they made and that they were advised to make, they were asking for far too much relief that it was not in justifiable based upon the current nor future situation and frankly would have been damaging to them and to their creditors at the same time. There's no magic formula, but you want to try to get to a solution where the creditors recognize that some relief is appropriate, but they can do it in such a way where if possible, they can share in some upside going forward.
And that's why you're seeing more consideration of valid recovery instruments or contingent instruments in sovereign debt restructuring, and they can see a path forward where the country will grow and will provide additional opportunities for financing and also would reduce the yield on any outstanding financing so that there are win solutions in solving debt restructuring.
People often mistake the process as a zero sum game and I always resist that. There is more than one positive equilibrium that you can achieve through a debt restructuring and the skill is to try to get to the most optimal outcome for both sides.
Rasheed: There is a common question that's asked, I know, by Caribbean people when their country goes through debt restructuring. The question is, why do the Caribbean governments have to engage foreign law firms or foreign lawyers to help in the process of negotiation?
Thomas: Frankly not all Caribbean countries do engage foreign law firms. So sometimes they will do in a more advanced way, there are a couple of countries I can think of now who are in situations where they are trying to resolve it on their own. Which is fine from a political perspective, but they may not have had experience of having gone through this process before.
Hopefully these are one time transactions for government. And so if you're engaged in a one time transaction, you want to have advisors who have done this multiple times that can bring the benefit of the experience from those multiple clients to the process. That is what often drives the consideration as to advisors.
Secondly, most of the debt instruments, these foreign law and debt instruments are governed by New York or English law. And so for that reason, we a law firm experienced in those two legal jurisdictions in order to provide the technical legal advice associated with the structuring of those instruments.
So that's another reason why you see foreign legal advisors in play. Those are two justifiable reasons, but here's some of the sentiment behind your question. This is a process that the government needs to own. They need to understand the process and they need to have the long term perspective that I articulated earlier around what is the appropriate outcome of the process.
And so I'm not suggesting that they be disengaged just because they hired a law firm to it or an financial advisor to deal with the experience on it.
Rasheed: So Thomas, shifting gears a bit. I want to dive into what is probably now the most popular question when it comes in national finance and that is climate finance, or should I say so-called "climate finance". Okay. Now how this is usually framed, is that a small country or a developing small country, will say, "okay, me, the small country cannot properly access cheap loans. International markets".
And that usually refers to some form of concessionary loans, especially from the World Bank or similar institutions. So they cannot access these loans because the economic grading or the economic level, you know, assessed by the World Bank or so on is too high to access the concessionary loan portfolio.
So, therefore, I, the small developing country am at a disadvantage in trying to do any kind of climate transition policy. So for this reason, There should be some new concessionary loan architecture to help me properly finance any climate activities. So I think this is true to the often framing of this topic, but do you think that framing is justified?
Thomas: I am sympathetic to that framing. So to step back a bit, as you say, many of the Caribbean countries have an income that is higher than the World Bank's threshold for concessional financing. So they are excluded for that reason, but they are still in very vulnerable economic situations and very vulnerable climate finance situations.
They need financing for climate mitigation. They need financing for climate adaptation, and these are goods. If you like the public goods, international public goods that they have difficulty being able to access. So I am very sympathetic to the proposals that have come into play, which would change the criteria for countries to obtain concessional financing.
There was a proposal in 2008, that was the last one I saw, that did not pass, that was going to include climate vulnerable middle and high income countries into the concessional financing windows of the World Bank and the IMF. I would very much support that. But the broader issue there is essentially there is a subsidy that is being provided to countries within scope in order for them to deal with a vulnerability that we consider it is important for the international community.
And the subsidy in the past has been focused on low income countries. And so it doesn't have to be just focused on the low income countries, it could be focused on the broader sector. And there are other ways of providing that subsidy. So in one of the proposals I made last year, where I was trying to deal with the twin challenge, of the need for additional financing for climate related vulnerabilities and the challenge of debt, the belief that some countries are also facing.
And I suggested that there'd be a subsidy from the official sector, i. e. from other governments and other international organizations through those countries that would allow them to obtain financing or to deal with their external debt service. So that's just another way of providing the subsidy. And I raise it now because I'm just illustrating that there are different ways of providing that subsidy.
So grants is one way, concessional financing is another way. I think the broader rubric of that analysis is that there is a good case for providing a subsidy in this area.
Rasheed: Before we go into your proposal in more detail I'm still curious in, in this sense. For example, generally speaking, I think climate finance is a very vague term, almost incurably, vague term. When you say, okay, when you say that climate finance is something you want to access well, what exactly do you want to do with the money?
In most cases you want to build infrastructure, basic infrastructure or advanced infrastructure or some kind of energy transition. So, for example, some plant, some battery storage, some road network, some school reinforcement and so on. There's always some kind of physical infrastructure in most cases.
And When it comes to this infrastructure for say any Caribbean, let's just say Barbados. Barbados has in general, decent revenue. It's not always used appropriately. But it has decent revenue. And in theory they could approach capital markets to borrow the money that they need, but they tend to, at least in my view, they tend to focus a lot of energy instead on this more concessionary grant funding from international monetary organizations. But shouldn't they approach capital markets as a first priority?
Thomas: That's another very insightful question. So I think my answer is both and, and I'm glad you raised it because it allows me to supplement what I just said. So I'm not suggesting that the whole approach be dealt with just by official sector financing and official sector financing on a concessional basis.
I am certainly not in that camp. You'll see in the full piece I produced that I was trying to find ways for so called "blended financing", where the official sector will work in concert with private pools of financing in order to resolve this financing conundrum. And I think we're seeing more and more situations where frankly the problem is far too big for one side to deal with on its own. The private sector can't deal with on their own for a number of legal and policy reasons, and frankly, the official sector can't deal with on their own. So we have to be creative and find ways where a country in Barbados situation can access both official sector financing and private financing. Hopefully access it in a way where they are working in concert, so you can have blended finance solutions for these current world problems. Yeah, I think that's the only important insight that you've made.
Rasheed: So specifically in your proposal, you have a suggestion that revolved around SDR allocations out of the IMF. Could you give some more detail on how you propose this to work?
Thomas: Now you've touched on a very sensitive part of my proposal. So when I wrote it, I knew that my friends in the U. S. government would be upset that any reference to the IMF's special drawing rights and the new allocation or even the transfer of those instruments creates some sensitivity. I don't want to bore your listeners with explaining what that sensitivity is.
But the core of my proposal was to say, okay, there are SDRs that are not being effectively used. We can think about ways for transferring them or providing grants to the eligible countries so that they can deal with their debt service. But if a country doesn't want to, make that subsidy through SDRs, it can do it in other ways are just a one form of a reserve asset, their particular form, which the IMF allocates to its member countries. But countries have other reserve assets that they could also transfer in order to get to the same solution.
I was conscious of the sensitivity and so I had worked around that sensitivity so that one shouldn't understand my proposal has just been limited to the transfer of SDRs. SDR is just one mechanism and I also mentioned explicitly that other forms of reserve assets could be transferred to provide the funding.
Rasheed: What other forms of reserve assets?
Thomas: There are other forms of reserve assets through currency. So for the U S government, they could transfer us dollars since that is a reserve asset or other forms of his assets, euros, for example, there's no necessary requirement in my proposal that the transfer be made in SDRs.
I was using SDRs as an example of assets that were available. that were underutilized and could be transferred. But if a country has a preference for transferring something else, then that's also feasible. .
Rasheed: To flesh out your proposal a bit more. You mentioned in passing in your piece that the G20 approach to that suspension was not particularly proper in, in your view, at least in your framing. Why is it that the suspension method from the G 20 doesn't really address the core problem, but your as you call it, "grand bargain idea" has a better attraction?
Thomas: Again, it touches on something we discussed earlier. So my proposal is trying to facilitate cooperation among three important parties, the debtor country, its official sector creditors, both other foreign governments and international organizations, and the private sector.
That's very different from the way the G20 had initially worked through some of these issues. So that they, through the death service suspension initiative, basically constructed that on their own. Then they followed up with the common framework. I mean, they constructed that on their own without taking into account the interests of the borrowing countries or the private creditors who were lending to those borrowing countries often at a much higher volume than the official sector. So, so that's one important process point that there needs to be all three parties around the table, thinking through solutions where they can partner. And then on the technical level, there are things that the official sector can do. For example, provide concessional financing.
The private sector can't do that. The private sector can provide financing at greater volume. They can provide financing into particular projects. We have to figure out ways where each side can accentuate its strengths in order to get to a common goal. That's very much part of my general thinking in this area, it's looking for areas of common ground and looking to accentuate strengths and let's say find mean solutions to very complicated
problems.
Rasheed: Going back to the G20 debt suspension. Why exactly was that initiative in your view, a poorly designed policy?
Thomas: Again, one has to step back and figure out what is the goal? Is the goal liquidity? As you recall, during the height of Covid, when the, the SSI was initiated, that was one of the main concerns that countries were constrained from liquidity and they needed liquidity to deal with the human and social costs associated with the COVID pandemic. So there is more than one way of providing liquidity. Suspension of debt obligations is one way. And that is a modality, which is feasible for other government creditors, but it is less feasible for the private sector for a number of legal and financial reasons. But interestingly, if you look at what happened in the COVID period, the private sector did step up and provide liquidity to many of the countries that were eligible for the debt service suspension initiative. They were able to receive additional financing from the private sector.
And so the liquidity objective was met through that different modality and not met through just a service suspension. And it takes me to what my overarching point is. Sometimes we get focused too much on the modality and not focused on the objective. So if the objective is to provide liquidity, then one needs to be more open to different ways of achieving that objective and not to say, okay, because this modality suits me and my particular class of businesses, then I'm going to design the whole framework just on this modality. That was one of the flaws of the G20's approach.
Rasheed: I have a different question. I don't know if you have any particular view on this, but I asked different people in this sector: the central banker and the private creditors.
Dollarization in small countries. Do you think that has a meaningful benefit when it comes to things like bond negotiations? If you don't have currency risk, for example, does dollarization open the door for small countries to have better platforms for actually accessing national credit?
Thomas: Now, I'm a mere lawyer, and that's a very complicated macroeconomic question, so I don't think I'm going to venture an answer here. From a debt restructuring perspective, of course, there is a difference when you're restructuring the currency, an obligation in the currency of the borrowing country, as opposed to maybe structuring a foreign currency or obligation. So there, there are some difference in the mechanics, but the point you're getting to as to the economic advantages of dollarization or not, I'm going to pass on that one, my friend.
Rasheed: Okay, Thomas, final question. What is your biggest advice that you wished people understood more when it comes to thinking about climate finance in small countries?
Thomas: I'm actually talking to a couple of small Caribbean countries at the moment about their climate financing needs.
And I'm trying to get them to think holistically. Don't just think about one particular source of financing. Think about it in a more integrated way, how you can leverage the different sources of financing. You can think long term. Also within that bucket, insurance products also deserve consideration there.
I know sometimes that there are expense associated with using insurance products, but there are insurance facilities both on a regional Caribbean basis and on individual country basis. They also need to be part of the picture because the situation is dire. There are significant risks on the long term basis, but there are also significant acute risks for these countries.
And so you can't afford to think just within the box and think about one particular instrument. I think outside of the box, if possible, and think as broadly as possible. That's the type of exercise that I try to encourage countries to engage in.
Rasheed: Thomas. Thank you so much for joining me on the podcast today. This has been a very insightful conversation.
Thomas: Thank you, sir. I look forward to talking again sometime.