How the Iran War Reshapes the Sovereign Debt Landscape | Sovereign Debt Expert Lupin Rahman
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Today's episode is brought to you by the Unlimited HFGM Global Macro ETF, ticker HFGM. Later in the show, you'll hear more about HFGM, currently the number one Morningstar rated fund since its inception in The US macro trading category. Let's get into it. I'm joined today by Lupin Raman, an independent sovereign debt specialist who was an economist at the World Bank International Monetary Fund, and most recently was head of sovereign credit at PIMCO. Lupin, welcome to Monetary Matters. Good to see you.
Good to see you as well, Jack.
So you're the author. Also, I have a recent book, The Sovereign An Essential Guide to Returns, Defaults, and Government Bond Investing. Wanna start by just asking you, what are some differences between investing in sovereign credit versus investing in more vanilla corporate debt that maybe more people are familiar with?
It's a great place to start, Jack, because sovereigns are very unique issuers. They have a tremendous amount of power compared to a creditor that you would have. When you're lending to a corporate, essentially there are bankruptcy procedures that are very well defined in most countries, especially in The UK and The US. If you're lending to a sovereign, however, there really isn't a bankruptcy code which already disadvantages creditors in terms of the workout solutions if things go really wrong. But there's another element in that sovereigns are able to really change the parameters in which cre
Thank you. And with corporate credit, your primary concern is that you're not being paid back. With sovereign credit, you have that concern of not being paid back. What are some of the other risks?
So the risks are really twofold, right? Are they going to want to pay you back? So the willingness to repay and are they able to pay you back? The ability to repay. And so the ability to repay part is the element of the risk, which is much more easier to quantify, right? You look at fiscal balance sheets, you look at the central bank, you look at how many foreign exchange reserves they have, our policies credible, are they anchored? But then essentially the kind of willingness to repay part comes at a different, very qualitative aspect of looking at the credit. So willingness could be because
And then tell us about that FX currency risk, which I imagine is much, much greater than most fixed income investors are used to, as well as the transition from a lot of hard currency bonds to local currency bonds.
That's absolutely right. And I think that we have to be clear that this is really related to emerging markets that are issuing in a currency that's not their local currency. So most advanced economies issue in their local currency. The U. S. Treasury issues in dollars, German Treasury will issue in Euros, Japan will issue in the Yen. But if you are a Brazil, you are going to be issuing part of your currency, a part of your debt in Brazilian real, but you'll also be issuing in dollars. If you're frontier market, you may not even have a local debt market that you can tap. So you're issuing mostl
I wonder, Lupin, that you and the other very in the weeds sovereign analysts who are analyzing the ability to repay, you're making objective analysis, quant you know, quantitative analysis, also speaking to the finance ministers, making qualitative judgments. I wonder that it has it ever occurred or is it possible that when you are investing in emerging market local currency debts or frontier market local currency debt, that a lot of the gyrations in the local currencies have little to do with the microeconomic fundamentals o
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