• The Iran Agent Playbook (Updated)

    The Iran Agent Playbook (Updated)

    I anagrammed the title in order to give it a lower profile. In fact, these days I feel safer disagreeing with the Revolutionary Guards than with certain creditors of Argentina.

    However, I feel compelled to post this because something big appears to have happened this week in the perception about how Argentina will deal with its debt burden. So, to my antagonists: please be nice, you may not agree with me but I’m just trying to help.

    As many of you know, it has been my position that the Argentina’s sovereign debt negotiations were a three-party game with two phases: the first one, the calculation of Argentina’s debt sustainability, had the potential of producing very sizeable gains from cooperation between Argentina and its private creditors, along with admittedly more modest, but still positive, benefits for the IMF. This first phase screamed for cooperation among all three parties in order to generate as large a “pie” as possible to be subsequently negotiated over. I further argued that, although this first phase required skill, such talent was not so much haggling genius as it was the expertise to identify and quantify the gains from cooperation to each of the parties1. Obviously, in the second stage, the “splitting of the pie”, the gains from tri-party cooperation were not so obvious so it could become a more conventional three-or-more-party negotiating game, complete with assessments of relative power and of each party’s perception of such relative power, along with the enormous complexities introduced by a set of six cooperation-defection permutations, and the need for negotiators to think (consciously or not) in terms of Shapley values and nucleoli. While I’m not suggesting that people will be sitting at the table constantly recalculating the value of:

    skilled negotiators instinctively think that way.

    But, unfortunately, that road map appears to be off the cards (for) now. According to press reports, Argentina appears to have abandoned the strategy of the phase-1 “grand coalition” in favor of a day-1 defection, leaving its creditors to “fight it out” and “race to the bottom” for a deal. If Argentina is indeed thinking in those terms (big “if”, since nothing concrete has been announced), my educated guess it that it felt empowered by either the IMF or private creditors looking too anxious for a deal. Knowing how the IMF operates, I rule them out, and I conclude that if creditor anxiety was indeed the trigger for Argentina’s feeling of empowerment, the cause must have been its perception of private creditor angst.

    It is not an uncommon phenomenon and, unfortunately, it happens all too often, even at the highest levels. We all saw, for example in the negotiations with Iran, how Sen. Kerry’s usurping the role of lead U.S. negotiator Wendy Sherman betrayed his desperation to do a deal — any deal. In the process, he handed significant power and leverage to the Iranians, as reflected in the lopsided final agreement which, it can be argued, abandoned key U.S. interests.

    If true, this misguided Argentine defection will shrink the pie and, unfortunately for the Argentine people, faced with an inevitable defensive alliance between private creditors and the IMF, Argentina will be the biggest loser. That is, Argentina appears to have taken a lot of risk for very little expected benefit.

    Could private creditors have handled things differently to avoid breaking up the implied grand coalition? I think yes, and since the matter is still in flux, I’m going to give them two unsolicited (but free) pieces of advice to avoid the “Iran mistake” should they get another chance.

    The first is to negotiate roles in advance. Indeed, unlike Sen. Kerry whose willingness to airmail himself in at the 11th and a half hour every time erased Iran’s incentives to reveal its bottom line, private creditors’ principals should make themselves scarce during the negotiation process. The proper messaging is achieved by leaving day-to-day negotiations in the hands of agents and involving the principals only to break an impasse or bring a deal over the finish line.

    The second is that parties involved in high-stakes negotiations need to broaden their perspective. In fact, when people involved in a negotiation feel desperate to reach a deal, it’s often because they see no other way out of a difficult predicament. By taking steps to view the negotiation at hand from a broader frame of reference, they can ease their fears and project more power. In practical terms, that means:

    That if a principal’s alternatives to the desired negotiated outcome are unappealing, the principal needs to do what he or she can to improve his or her best alternative to a negotiated agreement. For example, continuing with the previous hypothetical, private creditors may have sought too eagerly to close a reprofiling deal lacking credit substance2 in the expectation that, however fleeting, a deal would cause a mark-to-market gain. Such a hypothetical principal having taken such conjectural position may have failed to realize that he or she had the alternative of communicating clearly with his or her investors that any gains from an ethereal deal were likely to be ephemeral and that sustained gains (i.e., an equal or larger share of a larger pie) could be obtained by cooperating with Argentina and the IMF within the grand coalition. In our view, such clear communication would have been well received by sophisticated investors and the negotiator given latitude to seek an equal or larger share of a bigger pie by proceeding more deliberately. Desperation can also arise from the sense that there is a lot riding on a deal: not just future business, but a businessperson’s long-term reputation, legacy aspirations, or even his or her organization’s financial health. For example, Kerry’s frenetic-seeming negotiating style could have been rooted in part in a desire to burnish his public image not long after a failed presidential run. By taking the long view, a principal lessens his or her odds of sabotaging his or her negotiation with stressed-out decision making and desperate-seeming behavior. Needless to say, this blog post is highly speculative. I don’t know what caused Argentina to defect or even if it in fact defected. The latest body language (“we’ll pay you…when we have the money”) is only one more datum in the long and meandering stream of consciousness emanating from the president-elect ever since he became the presumptive president. The possibility exists that, between now and December 10th, Mr. Fernández might come to realize that, by following through with his hypothetical defection, he would be making a high risk-low reward (i.e., negative NPV) investment, dooming his chances of a successful presidency.

    Should Mr. Fernández come full circle to where he was two weeks ago, my recommendation to Argentina’s private creditors would be to try to follow as closely as possible the grand coalition playbook (i.e., cooperate with Argentina and the IMF during the first phase of negotiations), reserve principals’ exposure for the turning points in the process (including the grand finale), and broaden their perspective (i.e., realize that what may look as the only way out of a bad predicament is not always best).

    1 I identified in the process several econometric methodologies which, for the reasons I explained then, could achieve this goal. 2 A reprofiling deal in in the absence of a credible fiscal plan is merely the exchange of one piece of printed paper for another: 40 cents is still 40 cents.

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    Carlos A. Abadi

    Carlos is a 30-year veteran international investment banker who pioneered a number of financial products, such as the trading and swapping of emerging markets sovereign loans in the wake of the 1982 Mexican debt crisis, the trading market for derivatives on emerging markets bonds and loans, the first non-dilutive CET1 transaction compliant with Basel III rules, and the first Chapter 11 filing for a Latin American issuer.

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