The Guardian 12 March 2013
The eurozone crisis rumbles on. After a period of relative calm, the deadlock following the Italian election reignited fears of a eurozone breakup. While the markets may have recovered momentarily, the shock reminded everyone that the crisis never really went away.
The currency bloc is in its worst recession since the second world war, while unemployment remains intolerably high. With countries still crippled by debt, their borrowing costs at the mercy of jittery markets, there is one man who is guaranteed to be at the heart of things.
Lee Buchheit, a lawyer at US firm Cleary Gottlieb, has been present at all the major debt crises of the past three decades. His reputation among investors is as a fearsome and aggressive litigator, but finance ministers in distress see him as something of a fairy godmother.
In Greece he has managed the largest sovereign-debt restructuring on record. In Iceland he was named man of the year after negotiating a deal delaying repayments to Britain over the collapse of Icesave. This is the man who stands up to the vulture funds – so named because they buy up the debt of desperately poor countries in order to chase them through the courts for repayment.
So it is something of a surprise to meet a slight, mild-mannered lawyer, with more than a whiff of academia about him.
He insists he does not make a moral judgement in choosing who he acts for, but rather enjoys working for the debtor nations. “It’s just more fun,” he says. “If you represent the lender, your client is tiresomely saying things to you like, ‘Why don’t they just pay us the money back?’ When you’re on the debtor side, you can say, ‘If you want to get it back, why did you give it to us?'”
These conversations, he says, reveal a lot about a country (or, in the case of the eurozone, a whole region). “The Europeans, many of them feel that even talking about this problem is an affront to national honour. To restructure your debt is tantamount to saying you are an emerging market and that is an intolerable affront to the dignity of a developed modern European state.”
But the public sense of shame does not yet match up to that he has witnessed in Asian countries, which were forced to renegotiate their debt in the late 1990s.
The South Koreans were evidently so humiliated by the prospect of restructuring that they donated jewellery and heirlooms to the banks to help them pay back their debts.
It was the Latin American crisis of the 1980s that plunged Buchheit into the world of sovereign debt. Joining Cleary Gottlieb in the late 1970s, he arrived in time for Mexico’s spectacular default. The Mexican finance minister hired the firm to negotiate its debt and, shortly afterwards, several other countries followed suit.
In that case the lenders had gone to the IMF asking for it to help these countries pay back their debts. But the institution told them to accept their dubious lending decisions and swallow the losses. Buchheit admits he expected the same to happen in Europe, so he was surprised when the IMF, the European Central Bank and the European commission – otherwise known as the troika – stepped in to prop up Greece and help repay its debts: “I did underestimate the extent of national pride, the extent of wishing to dissociate oneself from anything that appeared to be [characteristic of] emerging markets.”
It was an expensive experiment. The international lenders shelled out billions repaying Greece’s hungry creditors before coming to the same conclusion Buchheit posited in a paper in spring 2010: that Greece would have to radically restructure its debt.
In summer 2011 Buchheit finally got the call and helped thrash out a deal to slice 90% off the country’s crippling debt pile, with reference to a clause he has traced back to a British railroad bond contract of 1879.
With this on his track record, the markets now keep a close eye on Buchheit’s predictions. So what does he think will happen next?
In Greece, he says, there is more to do. Yes, it has slashed its debts but much of it has simply been transferred into loans from public institutions.
“To be made presentable again to the markets, you are going to have to do something with that debt stock, otherwise it hangs like a miasmic cloud over their future.”
Another “haircut” is not politically feasible. “No northern European politician is going to gleefully sign on to the proposition that they lost a euro. But they can say, ‘Let us stretch this out so that it matures on the 12th of never.'”
So Germany and the other eurozone countries might lend to Greece at a rate of 2%, and agree not to be repaid for another 40 years.
“Now,” says Buchheit, energised as he gets into the finer details of the debt market, “the purist would say you’ve kicked the can a long way down the road to be sure, but it’s still a can and it’s still pretty battered and you haven’t changed the debt to GDP [ratio] or any of that.”
But, he explains, investors will not worry about that if they can lend to Greece over, say, 39 years, as they will get their money back before the public sector lenders.
The more pressing question, however, is Cyprus. European leaders meet on Thursday to discuss the terms of its bailout. Meanwhile, its debt investors will be nervous to hear it was on Buchheit’s itinerary when he visited Europe in January.
Despite having an economy worth 0.2% of eurozone GDP, what happens in Cyprus will be crucial to the next stage of the crisis, says Buchheit. “Unless you believe that the crisis has passed – and I’m not in that camp yet – the world will watch what they do in Cyprus and view it as an expression of their current thinking.
“In one sense, the fact that Cyprus is small arguably allows them to experiment a bit more. But the world will watch it and see Spain.”
Spain, he says, may be a more immediate risk than Italy, with its mountains of regional, as well as national, debt. But fixing its problems will be anything but simple.
Much of Spain’s debt is held by Spanish banks, which means even if the government managed to negotiate a deal forcing investors to swallow heavy losses, it would be crippling its own institutions.
“It’s like Saddam Hussein’s human shields,” says Buchheit. “You can’t actually get at the target without shooting through your own financial system. It makes life very difficult.”
But these countries may as well not exist in the eyes of the markets, what with Italy’s current political impasse. Buchheit says: “The market moves so fast that, particularly the hedgies – they have the attention span of a Peruvian chinchilla, from one hour to the next they perceive different issues of being paramount importance. They’re quite smart.” And you feel the emphasis is on the “quite”.
Now 62, Buchheit admits he was considering retiring to an 18th-century farmstead he owns some years ago. So, what happened?
He gives a great laugh. “The world went into a debt crisis. I spent virtually my entire career preparing to do one thing and then all of a sudden the entire world decided to borrow more money than it can pay back.
“There’s absolutely no truth to the rumour I’ll be taking a job in the Vatican,” he adds, although some finance ministers probably consider him worthy of the divine role.