Articles by Mitu Gulati

With truly astonishing speed (in a little over a month) collective action clauses in US bonds for sovereign issuers have moved from taboo, to a tentative first try (Mexico), to what looked like consensus on the clause (Uruguay), to more change (Brazil). What does this sudden move from a point of unwillingness to try even minimal change to one of everyday experimentation tell us about the dynamics of the underlying system? And where does this leave the policy debate?

With the problem of sovereign debt everyone seems to assume that someone else, often referred to as 'the market', has figured out the solution. But even in the face of mounting billions in default and growing coordination problems, it looks to us as if nothing of the sort has occurred. The mechanism of the invisible hand is magical indeed - when it operates at all. But its operation is not safe to assume. Not even under the best possible set of conditions.

In the case of Ecuador about a year ago, to effect sovereign debt restructuring, lawyers turned to a solution embedded in the bond contracts themselves, using what is termed as an 'Exit Consent' offer. The lessons of the Ecuador experience are very relevant to Argentina today as a possible way to restructure its debt without the need for either a bail-out brokered by, say, the IMF or an international bankruptcy regime.

Newspapers for the past few weeks have been full of news about the UTI mess. And it is little wonder given that we have had massive losses in a mammoth mutual fund, high profile arrests, finance ministers pointing fingers at each other and even a prime minister offering to resign. Exactly what happened is still somewhat unclear, but the basics are as follows: The managers of UTI appear to have had their arms twisted (by a combination of ministerial pressures and private sector inducements) into making large investments in some flimsy high-tech stocks. Along with the rest of the high-tech equity market, UTI’s fortunes have suffered in recent times – and the losses with respect to the flimsy high-tech stocks were significant. That reversal of fortunes resulted in the once mighty UTI having to take some drastic steps such as restricting sales and repurchases of its US-64 fund. As was discovered later, however, this was not before some well-connected companies pulled out their money.