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Business Comment

Investors welcome the army’s intervention in Pakistan’s democracy despite its dismal past

Global Outlook

A country is in pretty dire straits if its stock market surges when the army starts intervening in the government. Welcome to Pakistan, where this was just what happened yesterday after a fortnight of increasingly bitter anti-government protests had sent investors fleeing.

As the crowds of protesters camped outside the parliament grew by their thousands, so share prices plunged.

But yesterday saw the biggest gain in more than five years for the KSE 100 index amid talk that the army was going to broker an end to the stand-off.

Opposition protesters claim that there was industrial-scale fraud in last year’s elections, when Nawaz Sharif was swept back to power as Prime Minister in a country whose history has overwhelmingly been dominated by military rule.

Whether or not they are right, as investors see it, the current discord is jeopardising Mr Sharif’s much-needed reform programme, including rolling back subsidies on energy prices and privatising state-owned businesses. Those privatisations, coupled with sovereign bond sales, are also part of a plan, in association with a $6.6bn (£4bn) IMF loan, that would stabilise the economy.

However, driving through such radical reforms needs a degree of political consensus. The level of crisis now between government and opposition threatens to send the programme off the rails, and is putting  instalment payments of that much-needed IMF cash in danger.

It remains to be seen exactly how the army, which led a coup in 1999, will attempt to resolve the impasse. General Raheel Sharif met opposition leaders Imran Khan – the dashing former cricketer – and the cleric Tahir-ul-Qadri in Islamabad on Thursday night, as well as the Prime Minister. It was these back-to-back talks that prompted Friday’s stock market rebound. All the signs are that the general, whose day job is still fighting Taliban insurgents on the border with Afghanistan, wants to mediate a “democratic” solution. Investors are pretty confident that this prediction will prevail.

But the intervention highlights how the military, which deposed Mr Sharif in its last coup, still holds sway. It’s an impression made deeper by the fact that the General claims it was the Prime Minister, the very man the army ousted in 1999, who asked him to mediate. Mr Sharif denied that claim last night.

The rumour mill has it that the army’s help will come with strings attached, including the Prime Minister reining back his aim to weakening its grip on Pakistan’s foreign and defence policy. Some say the army will seek to curb his ambition to deepen trade links with the old enemy, India.

Yet with Pakistan having spent half its life under military rule, an outright ousting of the democratically elected Mr Sharif would send investors, particularly in the US, fleeing fast. It would reverse the 13 per cent rise in the stock market that greeted his election.

The army knows this and, while using the current impasse to strengthen its hand, it surely wants to avoid the appearance of another coup.

The markets hope, therefore, that the general will arrange a compromise whereby a weakened Mr Sharif continues limping on in charge, pushing through enough of his reforms to keep Western investors onside. If the army emerges with renewed influence then so be it – a return to stability is all.

Pakistan is still treading its way towards democracy in baby steps.

Vulture funds won’t be denied their dinner of sovereign debt 

It’s not often that investment banks and fund managers emerge as the good guys when it comes to dealing with indebted developing countries.

But that’s just the impression created in a document released yesterday, which details a new framework for dealing with the next Argentina-style debt crisis.

To recap, Argentina’s big lenders – most of which had made their loans years before the country’s 2001 default – agreed to accept a negotiated “haircut” in the amount that would be repaid to them. Frankly, much of the debt, particularly in Britain’s case, had been lent stupidly and recklessly to the military juntas of old.

During the default, however, a bunch of New York “vulture funds” bought up billions of dollars of Argentina’s bonds on the cheap and have fought for years to get their bit of the borrowing repaid in full.

Argentina was forced to default again over the summer due to the successful battling of these funds in the US courts.

The vulture funds’ behaviour has been galling, of course, to the big banks, central banks and other blue-chip investors which had agreed that their longer-term interests were best served with the negotiated settlement.

So yesterday, 450 of them, including Goldman Sachs, Morgan Stanley and Citibank, clubbed together to announce how the next sovereign default crisis should be dealt with. Key to their plan is the “collective action” clause. This is an arrangement that would allow the majority of bondholders to agree to strike a haircut deal on the troubled country’s repayments that would be legally binding on all holders of the bonds – including vulture funds holding out for more.

As long as most lenders were on board, any haircut deal could no longer be exploded by a small group of short-term opportunists.

The new contract terms would, the International Capital Market Association hopes, go a long way to clarifying what “pari passu” – equal footing for all lenders – means when a borrower goes bad.

This all seems eminently sensible. But I can’t help fearing that the new forms of wording will prove less than watertight when tested in the courts by the brilliant minds of the vulture funds.

These are, lest we forget, firms whose very business model revolves around spending years litigating every last clause of every last contract until they find a loophole through which they can get their profit. No matter at whose expense.

Meanwhile, the Terminator approach of Paul Singer at Elliott Management, the vulture fund in the vanguard of the Argentinian bond raid, now sees him suing to seize the country’s assets around the world. This is now reportedly even extending to investments owned by anyone merely an associate of President Cristina Fernandez de Kirchner’s family. 

The New York Post reports that the next attempt could be on the Manhattan office investments controlled by a friend of Ms Fernandez’s late husband, the former Argentine president Nestor Kirchner.

Given Mr Singer’s extraordinary successes in the US courts so far, you wouldn’t bet against him. Similarly, in the brave “pari passu” attempt to curb his future sovereign debt raids, this is a rare case where you shouldn’t put money on investment banks to win.