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The Hausmann–Gorky Effect

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Abstract

On May 26, 2017, Harvard economist Ricardo Hausmann published an Op Ed titled “Hunger Bonds”, urging investors to avoid Venezuelan sovereign bonds on the grounds that the country was prioritizing payments on the bonds over remedying a humanitarian crisis. Contemporaneously, news emerged regarding a suspicious looking bond issue by Venezuela’s oil company that was purchased largely by Goldman Sachs. That bond got tagged with the label “Hunger Bond”, and suffered a price hit. Using both quantitative data and interviews with investors, we examine the causes of the Hunger Bond penalty, its impact on the prices of other outstanding Venezuelan bonds, and how long it was sustained. The primary determinants of the Hunger Bond penalty appear to have been a combination of negative press attention and crowd-sourced disapproval. For instance, we show that a large number of Google searches for “Hunger Bonds” are associated with a 200 basis point increase in the spread of the bond purchased by Goldman Sachs.

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Notes

  1. For skeptics from the economic perspective, who point to implementation barriers and possible collateral damage, see Rajan (2004); Choi and Posner (2007); and Janus (2012).

  2. To quote from two prominent legal commentators:Anna Gelpern writes:

    [N]o national or international tribunal has ever cited Odious Debt as grounds for invalidating a sovereign obligation. Each of the treaties and other examples of state practice cited even by the doctrine’s most thorough and principled advocates appears fundamentally flawed-it lacks one or more of the doctrine’s essential elements and/or is accompanied by a chorus of specific disavowals of the doctrine by indispensable parties. But even if the examples were on point, the fact that Odious Debt’s most fervent proponents to this day must cite an 1898 treaty and a 1923 arbitration as their best authorities suggests that the law-making project is in trouble.

    Gelpern (2005, p. 406).

    Christoph Paulus writes:

    The present article addresses itself exactly to [the] task [of analyzing the historical basis for a doctrine of Odious Debts] and comes to the conclusion that the remarkable inconsistencies within this historical development in addition with the almost complete lack of any explicit case material lead to the result that there is no such legal concept of odious debts.

    Paulus (2007, abstract). For optimistic perspectives on the existence of an Odious Debt doctrine, see Howse (2007) and King (2016).

  3. We emailed and asked him specifically and he responded that he had known nothing about the GSAM purchase at the time he wrote the Hunger Bonds piece—he only learned of it two days later from a Wall Street Journal piece that he then tweeted.

  4. Note that the first bond is closer in maturity with respect to the Hunger Bond but it has a much higher coupon (12 ¾% instead of 6%). The second bond has longer maturity but the same coupon (6%). In theory, when comparing spreads the coupon should not make a big difference. However, the coupon changes the duration of the bond and may become important in the presence of high default risk.

  5. To quote the opening paragraph of a World Bank report on the topic:

    The last few years have seen a rising chorus of demands from non-governmental and civil society organizations for the cancellation of the sovereign debt of many developing countries on the grounds that such debt is “odious”. Yet there is little agreement on a workable definition of “odious” debts. This should hardly be surprising, because those promoting the cancellation of “odious” debts are doing so for a variety of reasons, often pursuing widely differing aims.

    (Nehru and Thomas 2008).

  6. A complication here is whether a successor regime can use the “unclean hands” (in pari delicto) defense to defend actions by its predecessor regime. In the corporate context, this has been held to be possible in at least some contexts such as that of a receiver in bankruptcy. See Scholes v. Lehmann, 56 F.3d 750, 752–753 (7th Cir. 1995) (Posner, J.); see also Buchheit et al. 2007, pp. 1257–1258. But the claim appears less likely to work in the sovereign context where a new government is trying to defend against paying the obligations of a misbehaving predecessor government. See Republic of Iraq. v. ABB et al., 768 F.3d 145 (2d. Cir. 2014). So, ultimately, this may boil down to whether the court in question sees PDVSA as a separate enough entity from the Republic to view it as a corporation or sees it as essentially the sovereign.

  7. In effect, assuming a default, the later creditor with the inflated principal amount obtains a type of structural priority over prior creditors by taking a disproportionate share of the limited set of assets that the distressed debtor has. Scholars of sovereign debt have flagged this debt dilution scenario as a potential problem in settings where there is no enforceable formal priority structure for debt, but this is one of the few concrete examples we have seen. See Weidemaier and Block-Lieb (2018); Bolton and Jeanne (2009).

  8. The two events we examine are: (a) when the US Treasury Department, on August 25, 2017 put out a list of bonds, trading in which was exempt from sanctions, and failed to exclude the Hunger Bonds (a matter which was rumored to have been discussed at the US Treasury department) and (b) when, on November 28, 2017, after credit default swaps had been triggered for PDVSA, the International Swap Dealers Association (ISDA) determined that one of the bonds that could be delivered into the auction was the Hunger Bond—in effect, therefore, making a determination that whatever taint that these bonds had, they were still acceptable for purposes of a generic CDS contract written on a package of PDVSA bonds. We pick these events because they are the two that the financial press commented on in the context of the Hunger Bonds not being singled out either for sanctions or as ineligible for delivery in the CDS auction. (Tanzi and Bartenstein 2017).

  9. Investors and asset managers repeatedly told us that, because of the large difference in coupon (6% versus 12.75%), the February 2022 bond was not directly comparable to the Hunger Bond. While the Hunger Bond had a higher spread than the February 2022 Bond until late July, after the Venezuelan strikes of July 17 and the US threat of sanctions, the price of the February 2022 bonds decreased at a faster rate than the price of the Hunger Bond. On July 20, the spread of the February bond surpassed that of the Hunger Bond. The differential between the two 2022 bonds then peaked after the imposition of sanctions on President Maduro on July 31st. The two 2022 bonds went back to trading at a similar spread in August 15.

  10. The title of Bloomberg’s piece says it all: “Goldman’s Hunger Bonds Dodge U.S. Sanctions That Bypass Traders”. (Tanzi and Bartenstein 2017).

  11. We obtain similar results if we use yields instead of spreads. All results are robust to estimating the model with Newey-West Standard errors and with a GARCH(1,1) model. We pretested the series for stationarity and find that the hypothesis that spreads have a unit root can be rejected at the 5% confidence level but cannot be rejected at the 1% confidence level (we use a model with two lags and a deterministic trend). The KPSS test, instead, suggests that the series are stationary.

  12. These events are: (i) the publication of Hausmann’s article in May 2017; (ii) the strikes of July 19, 2017; (ii) the imposition of sanctions on President Maduro (August 2, 2017); (iv) the exemption of the Hunger Bond from US sanctions (August 25, 2017); (v) President Maduro’s speech about the likely restructuring Venezuela’s debt (November 2, 2017); (vi) Venezuela classified in selective default (November 13, 2017); (vii) ISDA’s inclusion of the Hunger Bond in a list of bonds that are acceptable for the purposes of a generic CDS contract written on a package of PDVSA bonds (November 28, 2017); and (viii) the auction of December 13.

  13. The advantage of a comparator bond of a somewhat longer maturity is that the difference in spreads cannot be attributed to the fact that expectations of default have a smaller effect on the yields of bonds that are close to maturity. Our thanks to one of our referees for this point.

  14. We do not report the full regression results to save space (full results are available in the working paper version of this article, see Gulati and Panizza (2018a)) but also because standard stationarity tests suggest that bond prices may be better described as a unit root process.

  15. Results available upon request.

  16. As of this writing, we are attempting to investigate the puzzle here further.

  17. Some some small loans (as opposed to bonds) might have slipped the scrutiny of social media though. As we were doing our final revisions on this article, a reporter at a major financial news agency pointed us to an article in an obscure Spanish language publication describing a transaction very similar to the Hunger Bond one. See Petit (2018).

  18. M. Gorky, “Pas un sou au gouvernement russe”, L’Humanité, 9 April 1906.

  19. 5/95 = 0.052 and 5.5/95 = 0.058.

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Authors and Affiliations

  1. Department of Law, Duke University, 201 Science Drive, Durham, NC, USA

    Mitu Gulati

  2. Department of International Economics, The Graduate Institute, 1202, Geneva, Switzerland

    Ugo Panizza

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  1. Mitu Gulati
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  2. Ugo Panizza
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Correspondence to Mitu Gulati.

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Conflict of interest

Mitu Gulati declares that he has no conflicts of interest with respect to this article. Ugo Panizza declares that he has no conflicts of interest with respect to this article. In the case of both Gulati and Panizza, there is nothing further to declare on this matter.

Ethical Approval

Animals: No animals were involved in the research for this paper. Therefore, all applicable international, national, and/or institutional guidelines for the care and use of animals were followed. Humans: All procedures performed in studies involving human participants were in accordance with the ethical standards of the institutional and/or national research committee and with the 1964 Helsinki declaration and its later amendments or comparable ethical standards. Conversations with human subjects were conducted with informed consent having been obtained from all individual participants included in the study. (In case humans are involved.)

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Appendix

Appendix

Figure 4 plots the OID valuation of the three bonds described in Table 1. The straight lines plot the OID valuation of the principal; the overlapping lines plot the OID valuation of the principal plus accrued interests. In the case of the October 2022 bond (the Hunger Bond) there are two alternative OID valuations (see Box 1 for details).

Fig. 4
figure 4

Bond valuation using original issue discount

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Gulati, M., Panizza, U. The Hausmann–Gorky Effect. J Bus Ethics 166, 175–195 (2020). https://doi.org/10.1007/s10551-019-04132-9

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