Spade: If you kill me, how are you gonna get the bird? And if I know you can't afford to kill me, how are you gonna scare me into giving it to you?Gutman: Well, sir, there are other means of persuasion besides killing and threatening to kill.
Spade: Yes, that's, that's true. But â€" they're none of ‘em any good unless the threat of death is behind them â€" do you see what I mean? If you start something, I'll make it a matter of your having to kill me or call it off.
Gutman: (chuckling) That's an attitude, sir, that calls for the most delicate judgment on both sides. ‘Cause as you know, sir, in the heat of action, men are likely to forget where their best interests lie and that their emotions carry them away.
â€" From the movie “The Maltese Falcon†(1941).
This is the dynamic at work in the negotiations between Belize and its bondholders. Really it's the dynamic in most sovereign debt restructuring s.
On one level, sovereign debt restructuring is just like corporate debt restructuring. You have bondholders, you have holdout bondholders and you have a debtor that is more worried about surviving today than honoring commitments made long, long ago.
On the other level, it's entirely different. Most obviously, there is no bankruptcy code for sovereign nations. On the other hand, it's not clear there need be such a mechanism, since sovereign nations have, of course, sovereign immunity. A bondholder can't get a New York City Marshal to go issue a levy on the mini-van in front of the consulate.
So Belize has made an offer to its bondholders that they have reportedly rejected.
The bondholders have no direct way of making Belize pay, but they can make life difficult for Belize in the future, trying to snatch funds that flow through New York and causing no end of political hassles for the country.
Moreover, as a relatively small borrower, Belize probably has to worry more about long-term access to the financial markets than a country like Argentina or even Greece. The threat to shut a country like Belize out of the market is far more credible.
On the other hand, any recovery the bondholders can get through a restructuring deal is probably going to be the vast bulk of the total recovery. As such, the bondholders can't bargain so hard that Belize just says “forget it.â€
Inevitably this will lead to some commentary wondering why bondholders even bother to buy debt from high-risk countries like Belize. It's the same reason that bondholders buy debt in risky U.S. companies that have pledged all of their assets to secure a syndicated loan. After all, neither is likely to result in a big return upon default.
Stephen J. Lubben holds the Harvey Washington Wiley chair in corporate governance and business ethics at the Seton Hall University School of Law and is an expert on bankru ptcy.
