Walker & Dunlop, Inc. (WD) Earnings Call Transcript & Summary

All right. Let's get started. So good afternoon. I'm Susan Weber. I'm joining Walker & Dunlop's CEO, Willy Walker. [ For ] today it's Gregory Makoff, an expert on sovereign debt management. If you miss an episode of the Walker webcast, you can find our replays on YouTube. Just search for @WalkerDunlop. Thank you for joining us today, and now over to Willy.

Thanks, Susan, and good afternoon, everybody. It is a real pleasure for me to have Gregory joining me today. I'm going to do a quick bio, and then we will dive into our discussion on sovereign debt, Argentina, his great book entitled Default. We will talk in detail about how all that led to certain sovereign debt holders getting more money back from the Argentine government than others. That will then lead into a conversation on where Argentina sits today, and we actually might switch that around because Gregory would like to sort of start there. And then I want to talk about the U.S. debt situation and kind of the global sovereign debt picture as it relates to the United States having $26 trillion of debt outstanding, China having upwards of $50 trillion of standing, $11 trillion of emerging market debt outstanding, et cetera. So let me dive into a quick bio on you, Greg, and then we'll dive in. Gregory Makoff has been writing about sovereign debt for the past decade and he is the author of Default, the landmark -- landmark court battle over Argentina's $100 billion debt restructuring. Greg's career began as an investment banker and debt transaction specialists, advising companies, financial institutions and countries, including Jamaica, Colombia, The Philippines and Turkey regarding their debt management operations. Since 2015, he has published papers as a senior fellow at the Center for International Governance Innovation, CIGI. He worked with the U.S. Treasury on a team that supported the enactment of the Puerto Rico Oversight, Management, and Economic Stability Act, the law that has been facilitating the reform of Puerto Rico's public sector and the restructuring of its debt. Greg holds the PhD in Physics, from the University of Chicago and a BSC in Physics and Political Science from MIT. He is a senior fellow at Harvard Kennedy School, where he focuses on sovereign debt restructuring.

So Greg, as you and I were talking previously, you said, let's start with President Javier Milei, who is now the new President of Argentina, and he's going around in his campaign last year with a chainsaw to sort of exemplify what he plans to do with, if you will, the fiscal situation in Argentina today. Let me just open it up with what about Milei makes you either think that he has a chance to pull this off or not a chance in the world given what he is facing with the Argentine economy?

Well, thank you, Willy, for having me on the broadcast. And this is a fascinating revolutionary situation going on in Argentina. When I finished the book 1.5 years ago, I was writing the conclusion, I had to address, well, what should Argentina do, 200 years, 9 or 10 defaults, how do they get out of the mess? I couldn't imagine Argentina, the people elected a President holding a chainsaw, and he was promising the opposite of any other politician in history. He promise pay now, party later. Every other politician is saying, "I'll give you tax cuts. I'll give you benefits and I'll make the world great." Instead, he said, this is going to hurt, but people vote for them because they were tired. They had crisis in the '80s. Their wonderful reform plan of the '90s crushed and burned in the default of 2001, that sets off my book. And then they're back in the mass and the people are exhausted, they want change. And what he said made sense. He said, you spend too much, then the Central Bank prints too much money and then we'd have inflation. And when it comes to debt crisis, it's often not default, it's often just inflation and it hurts people, poor people, working people, and they understood that. And so against any expectation as outsider an economist, he is basically telling the truth, it wasn't foreigners who caused their problem, it was us. And so in some odd way, I wrote this book about Argentina's political problems dealing with its default of 2001. And at the same time, out of this messy history the people had said, enough. Now he's -- he has not a majority in the Congress. He's allied with some of the former President Macri [ forces ] but there's a big standoff in Argentina in that he's ruling by decree, not getting laws passed. So there's a lot of questions about whether it will succeed by kind of executive order. But this is the news of this year in Latin America. If he succeeds, this is going to be a complete change in the trajectory of Argentine history. If he doesn't, it's just more of the same Argentina and able to bridge differences and able to compromise at home and falling back into crisis. So that's the context of talking about Argentina and its repeat problems with debt.

So Greg, let's back up a little bit to the mid-'90 -- mid- to late-1990s. So Carlos Menem is President of Argentina. He has done 2 major things; one, peg the Argentine peso to the U.S. dollar; and two, began a huge privatization plan, which is taking big state-owned enterprises like YPF and selling them off to, in that case, he sold them to Repsol, which is a big Spanish company, sold the airlines, sold a bunch of other things. And GDP growth in 1996, 1997 and 1998 in Argentina was between 5% and 10%. It was one of the hottest economies on the face of the planet. And so it seems like everything was running very, very well until the Brazilian real devalued in '98. Talk for a moment, if you would, Greg, as it relates to why the devaluation of the Brazilian real was, the first -- if you will, the first domino to fall as it relates to the reforms that Menem had put in, and to the degree possible, then why is that playbook not accessible to Milei today?

Right. It's actually sidestep in my book, why are Argentina defaulted because I focus on the clean up story. Why did Argentina take 15 years to clean up its debt default of '01 when other countries take a year or 2? I helped you make a clean up its debt problems in 2 months. So this is the worst clean up operation ever but it is an important question. And in 2002, July, the Fed -- the [ Bureau of National Economics ] pulled together a bunch of economists to talk about why did it fail and you had 10 economist and 10 opinions. And the most common one was fixing the dollar to the peso was a mistake because they faced a competitive devaluation in that their nearest neighbor with the biggest economic linkages devalued 30%, which created a big terms of trade shock. Now the dollar was strong, which set the pressure for Brazil to do it but because Argentina had pegged to the dollar, it couldn't follow Brazil. And that had an immediate effect. But the backdrop, there's always multiple causes in a debt crisis. And Argentina was left with probably a bit too much debt in its Brady restructurings of the '90s and it just always kept growing from '93, '94, '95, '96. Even though its growing as an economy that debt is growing more, and there is also something underappreciated about the '90s, that the Convertibility law, which caused the one for one, also outlaw indexation. You were not allowed to index a wage crunch to inflation. And so when they defaulted in 2001, the country could do a real devaluation in that when the currency went from 1:1 to 3:1, wages went down and the economy recovered pretty quickly. And unfortunately, the problem Milei has today is the government since then reindex the whole society, pensions and wages completely indexed to inflation. So in an odd sense, Argentina's economic recovery in 2002, '03, '04 was eased by the discipline of the reforms of the '90s. So once you fix the currency peg and once you reduce some of the excess debt load, then the economy boomed again. But then some of the mistakes of the '80s came back and that's in the story. While Argentina is restructuring its debt in a big fight, its over spending and making some historical mistakes. So...

But on that, if I can double-click for a second, Greg, on the indexing and the peg to the dollar, the peg to the dollar, does that necessarily mean that unless the United States of America is your largest trading partner, you shouldn't peg your currency to the dollar? I mean, isn't it that Brazil was such a large trading partner of them. And by the way, today, as you well know, China and Brazil are their 2 largest trading partners. So right now, Milei is going to go and peg his currency to the U.S. dollar even though he does 3x as much trade with China and Brazil as he does with the United States. So he is setting the economy up for the same type of shock that it incurred in 1998 when Brazil devalued of not having control over its own currency to be able to do that and therefore, becoming price uncompetitive?

Well, Milei is head of [indiscernible], and he said a lot of things before being elected, and he pretty much dropped the refixing of the currency to the dollar. Now he doesn't say it's completely off the agenda but I think a lot of people on the government wishes it kind of disappears, they said, let's stabilize the economy first. So the question is, if the plan didn't work before, why go back and do that? So there's a question mark. The immediate thing he's doing is a massive budget cut. He is using the chainsaw even today in the news, he -- to balance the budget, he is cutting a lot of jobs as much as he can without the coordination of the Congress. So there is a -- was a lot of discussion in December, will he or will he not drop the dollar peg, and that's really not in the day-to-day conversation anymore. And I think a lot of economists will complain if that gets back on the agenda. But I think that's for 2 years from now. What he needs to do is winning the midterm elections, he needs to bring inflation down. He need some confidence to return. In reality, bond prices are coming up, there are some good signs but it's unchartered territory to be locked in war with another political party and be unable to pass legislation. But the monetary effect was true but the initial idea of the currency fix is that they have a fixed supply of money, which will stop the country from spending because it couldn't print money to pay excess wages, like lock up the currency supply and throw away the key. But then the country borrow dollar bonds. So they can stop it from printing pesos but the bond market was open and in the 90s, the international bond market was very forgiving. And even though Argentina's debt kept growing and growing, there was so much money to invest, they kept funding Argentina and the debt grew to more and more dangerous levels. And unfortunately, while I said, the law said the country couldn't index, he broke its rule when it sold its utilities with the help of the World Bank. It indexed the power contracts to the U.S. dollar, which shouldn't have been allowed under the law that they finagled it. And so when they defaulted, they defaulted all the utilities who borrowed in dollars because they thought they would get U.S. revenues. And if Argentina has had a fiscal problem since 2001, it's because instead of raising utility rates, they've subsidized them, which have been a gigantic drain on their treasury until today.

So doesn't that set up -- I mean on a similar -- one of the things that you point out in the book is that the utilities had been indexed that I mean right when De la Rua leaves in 2001 -- what it is?

2001, December.

Yes, 2001, when De la Rua gets evacuated from the Casa Rosada by a helicopter off the roof, and social strike hits in Argentina, one of the big concerns was that you had, foreign investors of Spanish and European companies who have gone and bought into these companies thinking, that in some instances, as you just said on the utility side, their prices would indexed. And all of that fell apart. So as he tries to do all the things that you just talked about this time around for a second time, how do you get the confidence of the international community to go and invest in companies and try and bring fresh new foreign direct investment into Argentina, given that track record?

Well, so we've gotten to December 2001. And between the currency and other decisions, the program of the '90s didn't work. It needed a devaluation. It needed a debt restructuring. And the utilities did not add up. So they had a twin default on all the utility contracts on $100 billion of bonds. And then there came this 15-year period leading to today of not cleaning it up the right way. And Argentina started pretty well. They tried to work with the IMF, and the IMF was saying, well, you got to fix this, you've got a fixed that. In Argentina, there is a lot of finger-pointing. Well, you gave us bad advice in the '90s, we want to do it our way. And Argentina was right about a lot of things. But one of the problems was the President -- after the temporary President Duhalde left, President Kirchner, he wanted to slow walk fixing the utilities because he didn't want to raise utility prices. And in the end, while there was a big and moral fight over the bonds, which you could argue both ways. How deep haircut should have been and how it was negotiated. The fact is the underbelly was not dealing with the utilities, which by 2010, '11, '12 is costing 4% of GDP in the budget, which is what kills the country. But in Argentina's perspective, it was willing under Minister Lavagna when he did its deal and brought it to the market to run a 3% primary surplus. This means your revenue, above your expenses before your debt payments. So that means economy generating 3% of GDP to pay interest in principle going forward. That's what he was willing to do, and that's pretty big. But corresponding to that, he needed a 75% reduction of this foreign debt, his euro bonds, his dollar bonds, his yen bonds. Creditors were shocked because in the '90 Brady restructuring, they've gotten $0.75 on the dollar, in the sense they got 65% on the dollar plus all their past due interest. And he's 1/3 of what they used to get. And the creditors are going crazy but he says, "We don't want to find ourselves in default again in 10 years." We were stuck in the '80s. Our plan at the '90s failed. In 10 years, we don't want to be in trouble again. We will run a 3% surplus but we need this deep haircut and the creditors organized, they lobbied in the Financial Times and other newspapers. They went to the Board of the IMF and they said, cut off the money, Argentina is breaking all the rules, you have to stop them. And that caused a big fight with Argentina, very Arkin rule stuff. Argentina said, I don't want to listen to anymore. I'm pausing the relationship, and I'm going to sell this deal without your help. But we have to keep something in mind, the technical aspect. When you tend to think you have the debtor and the creditor. Well, the creditor was complicated, 152 bonds in 8 different laws under 7 different currencies, $80 billion nominal, $20 billion past due interest. A lot of institutional investors in London and New York, all the financial centers but over 0.5 million retail investors, including 450,000 moms and pops in Europe who were sold these bonds by their local banks. In Italy, they have, let's say, 350 small banks. We buy CDs, right? We buy mutual funds. We buy individual stocks. That's how we seek. They bought government bonds because in the '80s and '90s, Italian government bonds yielded 13%. Why go anywhere else? But by 2000, when Italy joins the Euro, the yield has fallen to 3.5 in the 60-, 50-year-old retirees, the old lady from the mountains says, "How can I reinvest my maturing Italian government bond to get 10%?" And they said, "How about Argentina?" And 1/3 of Argentines are Italian origin and they love Argentine soccer players. So they bought the [indiscernible] bonds, the Argentine famous [ play of ] bonds. So really, it was that simple, and Argentina had a big reputation but it was a horrible credit. It was a horrible human mistake. And so you don't only have the country suffering and really needs this haircut, you have a disaster on the savings of a bunch of Italians. And the Italian banks organized because they don't want to be sued by their clients and they say, let's fight this deal and they push very hard against the deal. And to get this deal done, Argentina sold it famously on threats. And this is important because in court, the judge didn't like the threats. They job owned verbal threats. We won't pay you a penny if you don't come in. Contractual threats, something in the contract, if we pay the other guy more, we'll pay you more, which would be impossible. And third, they passed a low on the Congress called The Lock Law saying we forbid the executive department to ever make another offer to ever talk to a holdout to ever pay a court judgment. Now [ Elliott ] has just come in New York and they show that to the judge who gets really mad.

And so let's talk about the judge for a moment, and let's also talk about the holdout of Elliott Management. So Elliott Management between '96 and 2000 had been a holdout on the Peruvian debt crisis, and it actually won that case by making a case as it relates to pari passu payments, and I want to get you to talk about that in a second on the pari passu. But before we do that, talk about Thomas Griesa, the Southern District judge give a little bit of background, if you would, Greg, on. He's a Nixon appointee. At that time, he was in his what mid-'70s when this case came to his desk?

He was 70.

So he's a little long in the tooth. He's appointed by a Republican President and yet he had 2 previous cases, which showed that he sort of had a soft spot for the small guy, if you will. Talk for a moment and give a little bit on why Griesa was, to a great degree, the perfect judge for Elliott Management as being a holdout here?

Well, he really does not like abusive governments. And in time he was convinced Argentina was horribly abusive to creditors, to himself and to his own people. But it didn't start that way. But his earlier cases, in one, the U.S. had spied on Socialist Workers' Party and had sued to get the records of it, and the Attorney General of the U.S. Griffin Bell didn't want to give them back. And so he found the Attorney General of the United States in contempt to court, which was an extraordinary thing for a district court judge to do. It was overturned but he made his point in the '70s. And then there was this big to do over buildings this highway off the west side of Manhattan, where I live, which would have been sunk underneath -- right off the watering, destroy the breathing grounds at the striped bass. Now the issue wasn't to striped bass. It's the proponents who want to block it said every time you build another bridge, you just got more cars and more traffic. If we have $5 billion of Federal transit money, redirect it to the subways. And so he ended up putting up stays of Federal Funding finding technical problems with the environmental impact report. Remember, the environment laws were pretty new back then and the state was pushing scientists to quickly do them, and they weren't well done. So they kept finding technical problems and he helped the funding hostage enough. New York State was in a use it or lose it position, and billions went to the subway instead of to this under the West Side roadway, which would have been swamped by Hurricane Sandy.

I hadn't thought about that -- after having read that in your book, I hadn't thought that it would have been probably destroyed subsequently.

But let me build on what you said because every Argentine reporter I talked to asked me, why did this cranky judge hate us? And that is not true at all. Between 2001 default and 2005 restructuring, he did everything in his power to help Argentina. He stayed litigation as far as he could. He even yelled at the clerk appoint. He said, "There's evidence you can collect a penny, you'd be wasting your time running around the world, trying to attach things with little result. Sometimes it's better to take a little bit then to get nothing." So if you face the decision to take Argentina's offer, which ended up being $0.34 on the dollar plus some extra payments if the economy did well or this cranky judge who is saying good luck trying to attach, he was Argentina's best friend for at least 5 years. He only got tired with Argentina later, which Elliott took advantage of.

And so Elliott has Ted Olson. So anyone who doesn't know the intricacies of this case, Ted Olson is an extremely famous litigator who has gone in front of the Supreme Court many, many times and actually was involved with the gay marriage case that was to made gay marriage the United States legal. I can't remember exactly what the date is on that, Greg, but back in the early what, '11, '12?

'12, '13.

'12, '13, exactly.

Hollingsworth versus Perry.

Right. So when Olson also goes in front of Griesa and says, on behalf of Elliott Management, and points back to the Peru pari passu claim and holds it up against Argentina, explained to our listeners what Ted Olson was arguing in front of Griesa with that claim that Elliott had successfully put in place against Peru.

Yes. I think that we have to fill in a gap that from the 2005 default to 2010, so Argentina does this deal. It sells it on threat, 76% of creditors take it, 20 billion don't, and there's hundreds of lawsuits and total mess. So this relatively friendly judge gets swamped with chaotic mass litigation, big plaintiffs, small plaintiffs, class action plaintiffs, day and night, motion suits, judgments, hearings, attachments, it's horrible and it's all failing because this sovereign immunity laws make it easy to sue. But every time they found an asset, the judge would read the rule and it's very hard to keep an asset because the Foreign Sovereign Immunities Acts of 1976 puts a very high bar to keeping it. And without going into the details, it was catch and release. Here, we found a satellite part of Argentina. The judge reads the rules, release it, we found a bank account, release it, we found a ship, release it. At 2010, most creditors were exhausted and unsophisticated Argentina reopens its offer, it went to Congress, got approval to do it again, and it raises the success rate to 92%. The judge is exhausted with Argentina. He wants them to pay, he wants the litigation over and in September 2010, there were only 8% of the original plaintiffs left, led now by Elliott who organizes them all. The chaos was gone and Elliott sends Ted Olson to court to make an argument saying, Argentina is not helping us here. They won't pay this last 8%. Their economy is doing well. They had $50 billion in the bank, we're owed couple of billion dollars. They are willfully ignoring the jurisdiction of your court, and we have a way to fix it. Now the clause has to do with how we justified the remedy. The breach is this. Since 2001, the 8% hadn't received a penny. They were in default. They didn't take a restructuring offer. Argentina paid nothing. Those who took its deal in 2005 and '10, were getting their semiannual payments on their new bonds, a smaller amount of bonds but they were getting paid regularly. How is it fair that one set of securities is getting paid in full as do on time and another get 0 every time. He says, this is not equal treatment and Argentina's bonds have a clause saying you have to treat them equally. What that meant was subject to much legal discussion. But when you looked at it, any way you looked at it, it was unequal, especially when Argentina passed a law saying they would never pay those who don't come in. And so with that argument, they convinced judge Griesa to find a violation of a covenant but the art of it was the remedy because the problem with a bond from a foreign country, even under New York law, is the courts up here, I'm sitting here in New York in, South America is down there. Whatever the court says, the government is a sovereign, they can say, I won't do it. But the clever remedy was the plaintiffs figured out reading the documents, all for the cash flows from Argentina's bonds go from the Central Bank in Argentina by contract to New York City to the Bank of New York Mellon, who distributes it to the rest of the world. And because the judge sits in New York and has authority over any institution in New York, if the judge made an injunction against Argentina to not make payments to the 92% and sends that injunction over to the Bank of New York, they're not going to make the payment because violating an injunction on behalf of a client would be aiding and embedding a crime. And so they said, see you can do an injunction and Argentina can't thumb its nose at it, and it will stop all this litigation and your misery processing these hundreds of cases will be over, it will be simple and over with. Finally, they will pay their just debt. And the judge liked it but he didn't just say yes. He didn't want to blockade the payment to the 92% who took a loss, blockade them until they pay that 8% to get paid in full, which was the proposal. That's not fair, like 92% get $0.34 on the dollar and 8% get full payment plus all past due interest. He didn't want to do it but he turned Argentina's table and said, "Well, okay, how are you going to pay off these judgments?" And they said, "I think, I'll get around to it some time." And he said, "Well, I'm going to rule for the breach," and then it came to the injunction and before he gave the injunction, he turned Argentina's table and they had no constructive solution. He said, "Well, I'm going to impose the injunction." And then they went to the second circuit, in the second circuit says, "Well, I'm going to affirm this injunction. Would you like a different payment plan?" It's kind of harsh to pay the 8% everything owed now and in the future upfront, they pay a $0.01 to the 92% and Argentina sent a letter to the second circuit saying, my way or the highway. So the second circuit wrote in their final opinion that Argentina was a uniquely recalcitrant debtor and affirm judge Griesa. So it's a very odd situation because Argentina got a great deal on 92% of its debt, a historically deep haircut but really stubbed its toe with the courts on this last 8%.

And it wasn't until Macri came in as President in '16, where he comes in as the new President and says, "I'm done with all this stuff, settle and get it done." Would you think -- what would have happened if Macri hadn't come in, Greg, and said, "We're done here. I'm a new base to the Argentine government. I need to get this economy going. I don't need this sitting as an albatross around the country's international reputation. Solve it." You think it would have kept ongoing? Or was -- I mean at the end of the day, Macri coming in was the ultimate solution of this, correct?

Yes. So we skipped over this step was that, when Argentina's appeals ran out in June 2014, this injunction went into effect, and Argentina had a choice. Given it was blocked from making these payments, it could either perpetually and pay the 8% in full to be able to process its payment to the 92%. There was a payment due June 30, 2014, it had a 1-month grace period, or it can say, "I don't care, thumb its nose, not pay the 92% in order to not pay the 8%, and unwind all of its progress since 2001, the worst-case scenario and the President, even though it sent to Minister up and tried to negotiate a bit, eventually said, "No, thank you." And Macri was going to be running for President and they eventually decided, well, let's deal with this after the next election in 2015. And we'll have more bargaining power. So it looked very bad because Elliott was kind of the hero to the market fighting the big bad government but then the got this injunction that led to a default on $30 billion of bonds and the rest of the market were mad at them. And everybody looks bad here. But surprisingly, the reformist can at most party led by Macri, one, the election in 2015 by an inch. And surprising everybody, he sent 2 really smart former investment bankers who are signed to Secretary of Finance and Under Secretary of Finance, and sent them in New York and said, do not come back and tell you fix the problem. But instead of just telling the judge up, we'll pay and go home, they got -- made a big issue with the Special Master named Daniel Pollack, hired by the judge Griesa, actually an old friend of his. And he said, "They don't want $0.100, like the old government offered $0.34 on the dollar. We'll offer $0.100 and we'll pay some interest but these guys want 10x a $0.100 because they bought these funny bonds with these derivatives embedded. And so if they went to $0.100, they get $0.1,000 back, and we don't want to do that. We want a discount. And eventually, with some other creditors on [indiscernible] bonds, they negotiated 30% discount with a bunch of the running 60,000 Italian holders, they paid $100 plus 50%. So 150% of par. And they went to the judge and said, well, we're being reasonable now. We're negotiating, will you lift this injunction? But Elliott and the other big plaintiffs didn't want that to happen. They wanted more and they didn't want to be dictated to but the judge said, "Well, Argentina is not being uniquely recalcitrant anymore, I am going to lift the injunction." So they were basically forced to settle at what became $0.75 on the dollar plus payment of legal expenses and stuff. So it was a very dramatic twist ending. And this made Caputo and Bausili, the 2 people sent up, Luis Caputo and Santiago Bausili, very famous for not only settling it, getting almost $1 billion savings. Guess who is the Minister of the Economy today under Milei, Luis Caputo and the Head of the Central Bank, Santiago Bausil, the stars of my last chapter. So I couldn't have imagined any of this happening when I'm sitting in a pizza restaurant, having coffee and interviewing the now Minister 4 years ago for his story about how he settled it.

Although if Milei gets what he wants, Bausil may not have a job but that's a whole another issue as it relates whether the Central Bank even continues to exist in Argentina. Let me go to one specific thing before we move from that to the current day, if you will, as it relates to both Argentina as well as the world and the U.S. and China. One of the things you write about writing the book, is that the collective action clause could not be retroactively put on the Argentine bonds. My question to you is, are all sovereign issuances today, do they have a collection active clause that doesn't allow for the breakout of investors like happened in the Argentine situation? Or do more sovereign bonds that are out there today, not have a collection actions clause, which then allows for what happens in this case where you've got disparate investor groups that some settle others don't have this long protracted played out legal battle?

Yes. Let me back up a little and explain it generally for those not familiar with the lingo. Sovereigns can't file for bankruptcy. Just like Chapter 11, they say in the news, the company filed for protection from its creditors. Protection means a stay of litigation. So when a country defaults, it can't file under the bankruptcy court and ask the judge for a stay. There is no filing and the litigation starts the next day. The other thing bankruptcy does in Chapter 11 is there's a plan and there's a vote of plan. And when it's accepted and the judge blesses it and there's a vote of 2/3 of the creditors, the plan is accepted, and all the debt is discharged. The company is clean and it has a new life. There is no bankruptcy filing for countries, so they don't have a vote in a discharge. So if Argentina settled 76% of its debt in a voluntary offer, the other 24% is still there and still sues. Then in 2010, Argentina settles 92% of its debt and the 8% is still left over and it still sues. And after 2016, Argentina settled 99% of this debt and there's still some people suing to today. So the market really did not like this redefault in 2014, the 92%, the majority of the market, the black rocks of this world, the fidelities of this world, the PIMCOs of this world, we don't like the specialist funds who ask courts for blockades on payments to me, and they agree to buy new bonds where there is a voting provision like in bankruptcy. But it's in the contract. So when you buy a bond in the contract, it says that 75% of us agree to a 50% haircut, it's binding on a 100%. Since 2014, a every bond has had a very powerful version of these. From 2003, every bond had a moderately powerful version. As of now, I would say, about 70% of bonds have these. In 10 years, it will be over 90%. And so really, the market had solved this problem. Ecuador and Argentina defaulted restructured in 2020. In COVID, they had no holdout problems. They use these clauses, it works. It's kind of you solve the 80% of the problem with 10% of the effort. It's one of those things that works a lot but it's not a full bankruptcy system, solving every problem. And so the market is much improved. Argentina is still a mass but Argentina's saga changed the world.

Talk for a moment. I think it's important as we talk about the Argentine and the size of the Argentine economy. Many people probably don't know how to kind of size Argentina's economy versus the United States, whatever else. So one data point that I went and pulled out is that the Argentine's economy is about a $650 billion a year economy, which is about the size of the state of Michigan's economy. So just to kind of give people a sense here of the state of Michigan, for instance, today, I think has just about $40 billion of debt at the state level at Michigan, which is about the same amount of debt as the country of Argentina has outstanding as well, except for the fact that Michigan happens to be part of the United States of America, whereas Argentina is out on its own. Anything else that people ought to keep in mind as we talk about Argentina, the size of its GDP, it's kind of positioned in the world stage and then also emerging market debt?

Well, I'd put it this way. If -- my comparison of what matters in this world is that Argentina's GDP is about $600 billion and the US budget deficit last year was $1.7 trillion. You can face 3 Argentine economies into our budget deficit. The biggest problem in the world of finance is U.S. financers. Look what happened in the '80s when Volcker raised rates. It toppled all of Latin America. If we don't deal with our problems and our rates are going up a lot, it's global as a problem. So for me, yes, post-COVID, a lot of emerging markets, countries are struggling. Everybody spent a lot of money to stimulate their economies and buy COVID vaccines and stuff, and that's feeding through in the poorest countries like Zambia, Suriname, and Ghana, Sri Lanka. Places like Egypt and Pakistan, which are much bigger, like $300 billion, $400 billion economies are stressed but not toppled. But when you come to stuff that matters to every mom-and-pop in America, your listeners, the thing that matters, what have we learned from Argentina about where we are today.

But when you say that, Greg, like U.S. GDP to debt is about a 1:1 ratio. We're a $26 trillion here, $26 billion there. You look at China, China is a $17.7 trillion economy, and it has $52 trillion of foreign debt -- of total debt outstanding, not foreign debt because it Central Bank hasn't borrowed that much. But why doesn't that 3:1 debt to GDP ratio in China concern you a lot more than a 1:1 ratio in the United States?

I am very focused in the work I'm doing now at Harvard on China. It's a closed economy. It's not really a market. So they have capital controls. It's a domestic problem. And people have noticed their growth is going down. It's because President Xi wisely understood they were having too much debt and started pulling it back but the cost of slowing down debt creation is lower growth. And they're going to be dealing with that for a long time like Japan dealt with the crash of its '80s program for a long time. Here, we're an open market economy. And if you have an imbalance, you get punished for it, and it's very transparent. And people understand it. And we're at a much lower level and we're a much safer level, and we're the best country in the world by every measure. But people are beginning to talk about because while our debt is at a relatively benign 100% now, we're in the hockey stick where it's beginning to accelerate because one reason it's been low the last 10 years is because interest rate being artificially low since the global credit crisis. And now that rates are normalizing, then the interest expense build on the accumulated debt is higher and then it's compounding factor. So by 2050, before 2050 will be at 150% debt to GDP and there's a funny dialogue going on in the paper. You have yesterday, the Head of the Congressional Budget Office, what's his name?

Phillip Swagel.

Phillip Swagel saying...

I met with him, Greg, he came to the Real Estate Roundtable last year. First of all, just as a quick anecdote, he is, if you had to do central casting in Hollywood for a movie to have the Head of the Congressional Budget Office, Phillip Swagel is the person you would cast in that role. He is -- he just fits the mold perfectly as being a very straight shooting, sort of accountant-based type person. And go ahead, you dive into what he said yesterday.

Yesterday, he said at a conference, "We're on an unprecedented trajectory", and he's worried we'll have a debt crash and currency crash like the U.K. had in September '22, when Liz Truss's new Secretary of Exchequer, he announced a kind of imprudent tax cut on the highest wagers. And the market picked. And he says, our debt is getting so big, that's a risk. Now I've been thinking about that a lot. It is shocking as a markets person. I've worked in markets. Since I got my Ph.D. in '93 every day to see the U.K. pound in the U.K. bond market crash is absolutely shocking. And you have to ask, could that happen here? But I worked in the U.K. for 7 years. They have a very narrow market. 5 big investors on most of the bonds, it's not liquid like ours crisis. We have the infinite liquid market. If our debt goes bad, the yields will go up but it won't crush because there's another buyer. But the problem is that I agree with Mr. Swagel's concern, our debt is too high. But what happens is then you get Eisman, guy from the Big Short saying, "Oh, well, I'm not really worried about debt." So do you believe as a listener to Mr. Swagel, who says its urgent or Mr. Eisman who says, "Oh, I'm not worried. We'll be fine." The problem is you have to think of the 100% debt to GDP like you think about your bank account. Your bank account, let's say you have $100,000 in your savings account for retirement. And you look at it and next year, it goes to $110,000. And you're happy with it and you pay attention to it because it matters, because you're going to live on that in your retirement. Nobody is paying attention and thinking of this 100% of GDP, $30 trillion of debt, which we all owe and that's future taxes we have to pay, and that's future benefits from the government that are going to be cut. Things were used to like Social Security and Medicare. And so we should be concerned if that little account that were not bothering with now goes from 100% to 150% in the next 20 years because we will have to pay it. We're acting Argentine. We're acting like Argentine politicians who always party now, pay later . And as much as we have different people pointing fingers at each other, we have nobody here compared to Milei saying, "I'm going to make tough decisions for the stability of the long term." And I don't think to do what he is doing. I think we need a rational conversation about bending the curve. We need -- we're like this for our parties. In the '90s, we were pretty close. We could compromise. We made decent fiscal decisions and ended the decade of the '90s in best shape we've ever been as a nation. Then we had wars, crises, COVID, tax cuts and this horrible partisan divide. We need to get back towards the center where we can have conferences and conventions of people from both parties who can come up with a plan that's going to include compromise on both sides.

I guess on that, we got 2 candidates, both will be former President, whichever one is either being reelected for the second time after taking some time off or another one who is being reelected as sitting President, who, one, seems to be a profligate spender with no thought of the fiscal house and having a proposed budget of $7.5 trillion. And as you said previously, a deficit of $1.5 trillion on $7.5 trillion. And you have another one who is proposing reinstatement of tax credits, which will add $5 billion -- $5 trillion to the federal deficit if those tax cuts get extended when they're supposed to expire in 2025. So this issue that you just talked about eloquently, directly is clearly on the 2 major party candidates nowhere to be found on either one of their platforms. So how is it that smart scholars like you, very, very smart practitioners like Phillips Swagel at the Congressional Budget Office, are basically jumping up and now saying, be aware, this is a train wreck ready to happen, and yet neither of the major parties are even, not only not talking about it, or actually putting for proposals, they would exacerbate the problem.

I'm worried, and I think the problem isn't just the one issue, it's every issue. We're not talking about global warming the right way. I'm worried about where our debt is in 2050 but I'm worried the parts per million of carbon dioxide is 4.25, and it's going to be a lot higher. We're going to have a lot more damage happening on our coasts and stuff. But we are not putting rational discussion. So I'm thinking for the Congress, for the House, for the Senate, for every single office, even local and state, we need to vote in centrists. So I'm not saying Republican or Democrat. We need both types. We need people who want lower taxes, and we need people to argue for benefits that are human we needed. Look, we need spending. We need to deal with the competition from China. We need to deal with climate change but it's a question of calibrating. If we spend it needs to support real growth, they can't be handouts. And if we tax it has to be efficient. But we're not talking about efficiency and logic. We have a politics of divide. We have a politics of emotion. And so I think I offer my book, I'm an analytical person. And how to think about debt, how to ask the right questions about it, and understanding how painful it is if you screw up with it. And it's sort of that sort of message I want to leave.

Do you think that the broader debt, let's just say, problem/crisis that you articulated a moment ago, has the ability in the short term, not 2050? We're talking 2024, into '25, '26 to make it so that as the Fed starts to cut the Fed funds rate that the 10-year stays begrudgingly high because of this concern about overall, the fiscal house in the United States and the investors sit there and say, "Yes, you might have the short bond coming down." But for me to go buy a 10-year treasury, I need a yield of 4.5% because I think there's heightened risk on the long bond.

Not at all. What I think you have with Mr. Swagel and the other smart scholars, including at Harvard, who are raising their hand and saying that is a problem. They're going to be called chicken little because we're not going to crash today, then we're not going to crash next year, and we're not going to crash the next year or the following year. For those like me who predict the crash, people are going to say, "The crash didn't come, so I'm not going to listen to you." That's why I suggest watch the slow creep up of our liability, which we all owe. And I honestly think most of the market is a commodity market going off of supply and demand. There's huge demand for investment and those 10-year bonds are going to rally. And that's going to be good for the world. So in the short run, in the 4- to 8-year horizon, I'm with Mr. Eisman, it's not a problem. But that doesn't -- because it's not a problem for your stock market investments in 2 years and 4 years and 10 years, that doesn't mean you can ignore it because it's a time bomb that's getting bigger. And the thing about chicken little in the children's story is the sky never falls. There were analysts that my bank in the mid-90s saying, Argentina is going to default because the numbers don't add up as soon as the Brazil devaluation. People didn't want to talk out loud. The Argentina complain, he can only talk to hedge funds privately. People don't want to hear that but they're always right because they have reckoning come. So you look to be analytical. But as you said politically, you kind of need a crisis to shock people into doing anything about it. And I would rather reelect thoughtful people who can use analysis to decide to do something prudent ahead of us hitting a very painful crash and extra painful adjustment.

So -- but final question. As I think about currency, and you talked about the U.K. a moment ago, clearly, the UK economy, the liquidity in the market, it's currency, it's nothing close to the United States. We happen to have the great benefit of being the reserve currency in the world. As the euro was gaining more and more market share, there was very clearly a potential alternative to the dollar. We now know that, that the amount of euros outstanding versus dollars is no comparison. Does crypto present the opportunity to continue to grow and be a viable competitor to the dollar as it relates to the reserve currency? Or is that just so far out there that so many different things would have to happen that crypto really isn't a viable alternative to the dollar?

I don't think it's safe at all. If I have $10,000, I want to put it in JPMorgan. It's a regulated institution where the money is safe. You're really in the wild west, if you're getting any substantial amount of your money in crypto, I can't see mainline investors or Central Banks really trusting this asset class, really -- especially when there's so many of them. Think about it, we have $1, the $1, markets love one bond. Like when I traded at Salomon Brothers, we always talked about the on the run. You have the 30-year bond but when the new 30 was auctioned, nobody traded the old bond, everybody switched into the 30 -- to the new bond. Everybody trades the on the run. They only want to trade one thing. If anything survives, it's only Bitcoin and all those other cryptos should be worth 0. So that kills a lot of value there. And then there's the question, is this -- does this really work? So I think dollar, like Central Bank digital currencies to make it easier to transfer. So you don't have to pay so much to Mastercard and Visa and stuff like that. You couldn't further digitize payments without having to buy into trading puka shells or whatever the new thing everyone agrees on, I think it's a fraud. I think it's dangerous. I think for people who had some speculative money around, it's -- you're playing a trading game bigger fool theory. So I'd rather buy real bonds from real countries that are being prudent, Mexican bonds or Peruvian bonds or South African bonds, you get a good yield. And if you've studied the country, you may be -- you trust they'll pay for the next 10 years, American bonds but I think crypto, you might get 0.

And I said that was going to be my final question but I want to look back to Argentina for one final one, which is this. Hard to define what success will be for Milei, so I guess the way I would ask it, I would think this would be a success which is that he gets reelected to a second term. What do you think the odds are that Milei gets elected to a second term as just a proxy for "success or failure"?

I would say the success or failure is the midterm election. If he can pick up seats and get a political majority to start passing his plan, then he has a chance of winning the long-term battle. So that would be the 2025 October, I think, and that all eyes on that. And the question is can he rule by decree and keep the economy improving until he has the power of the Congress. Look, I want Argentina to succeed. I want the people to be out of crisis. I'm an optimist, and you get paid handsomely. If you bet on Argentina and they work on their bonds down, you make a good return but you're voting -- you're betting against history. So I can't give financial advice but I do talk to investors about this very bad. And I really wanted to work but I really hope that people compromise. They find a center. They agree on a program and they're not fighting. It is suboptimal to wait for a next election to actually come up with the plan.

Gregory, I greatly appreciate you taking the time. Your book Default is fantastic, anyone who hasn't read it, I would strongly recommend it. And I really appreciate you spending time talking about all this. This is a topic that fascinates me, and I'm super happy and thankful for your insight.

Thank you very much. This has been great.

Have a great day. Take care.

Bye-bye.