Jay Newman on the Coming Crisis for Emerging Markets

Tracy Alloway (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:15)

And I'm Joe Weisenthal.

Tracy Alloway (0:17)

Joe, it's been a while since we talked emerging markets.

Joe Weisenthal (0:20)

It really has been, and probably to our detriment, because there is a lot going on with EM. The commodities boom, the US dollar boom, the tightening cycle, inflation, there's the distress in Sri Lanka, among others. So there's a lot to go, there's a lot that's been going on.

Tracy Alloway (0:39)

Right, and every time you see the US raise interest rates, you generally see some pain in emerging markets, because the dollar goes up and the foreign currency payments that governments who have borrowed in the dollar have to pay, those go up. And it just feels like at the moment, with everything that's going on, and you mentioned the commodities boom, normally a commodities boom would be great for emerging markets, but this time it seems to come with a lot of imported inflation.

So this time, it seems like a really toxic mix for EM.

Joe Weisenthal (1:10)

And like acute shortages. So you could have a commodities boom, and it's like, okay, there are a bunch of commodity producing countries seeing big cash increase in their imports, or their cash flows right now. But if you're a country that doesn't have much domestic food, or a country that doesn't have much domestic wheat specifically, and there's a grain shortage, then it's a very distressing time.

Tracy Alloway (1:35)

Yeah, a very toxic mix politically as well. And of course, the other big thing that's going on is Russia.

And we've had lots of people expecting Russia to default on its bonds. That seems almost certain to happen now, given that the US Treasury has imposed even more restrictions on trading in the secondary market of the debt. They've also stopped investors from accepting bond payments from Russia. So it seems like a default is definitely going to happen, which means, of course, that we need to talk about all of this means.

Joe Weisenthal (2:07)

Let's get going.

Tracy Alloway (2:08)

All right. Without further ado, I am very pleased to say we really have the perfect guest to discuss. We are going to be speaking with Jay Newman. He is a former portfolio manager at Elliott, very instrumental in Elliott's pursuit of Argentina and all the drama that happened there. He's a sovereign debt specialist in general, now turned novelist, and his book is called Undermoney. That's out now.

Jay, welcome so much to the show.

Jay Newman (2:34)

Tracy, thank you and thank you, Joe.

Joe Weisenthal (2:36)

Thanks for coming on.

Tracy Alloway (2:37)

So maybe, given your decades of experience in EM, maybe just to begin with, we could ask the big question. How bad is it right now for EM and what is the most striking historical analogy or parallel that you would compare it to?

Jay Newman (2:54)

I think it's almost the perfect storm for EM and the only real comparison I can draw is from the very beginning of third world debt crises, which is the 80s.

The Foreign Sovereign Immunities Act was passed in 1976, the State Immunities Act in England in 1977, and then we saw a huge, huge volume of lending. It's the time when Walter Wriston famously said, to excuse lending to developing countries, he said, countries don't go bankrupt, which is completely accurate and totally useless if you're a creditor. But what we saw there was a period in which something like 25 countries defaulted.

Joe Weisenthal (3:35)

Sorry, and what years was it?

Jay Newman (3:37)

This was in, but the defaults started in the late 70s, but they extended into the 80s, and they weren't resolved really into the 90s. Of course, in the case of Argentina, which went on even longer.

But we're talking about a period that could be very, very stressful and distressing for developing country borrowers.

Joe Weisenthal (3:57)

Just going back, actually, before we even get too much in the present, why did 25 countries default?

Jay Newman (4:03)

They defaulted because markets closed to them.

And that's what typically happens.

The initial defaults in Poland and in Mexico made lenders very nervous. And when it came time to roll over the debt, there were no takers. That's what's happening today. I mean, it's almost an inedible process. When things are good and money is easy, people pile in and the underwriters find plenty of buyers. But all of a sudden, when one country defaults, let's take Lebanon, let's take Sri Lanka, which you mentioned, everyone says, whoa, what about country X and country Y and country Z? And then they become nervous, and then the debt can't get rolled.