A few days ago, I asked when Greece would restructure and noted that the emerging consensus seems to be that they will eventually have to do so. The real question is “when”? Well, the other question is “how?” and Lee Buchheit (Cleary Gottlieb Steen & Hamilton) and Mitu Gulati (Duke, law) have the answers in a paper just posted to SSRN (I mean really just posted, like 5 minutes ago).
A few key points about Greek debt generally, from the paper:
Þ Greece’s total debt as of end-April 2010 was approximately €319 billion. Of that figure, the vast majority -- approximately €294 billion -- was in the form of bonds.
Þ Virtually all of this debt was denominated in Euros. Small amounts (in aggregate, less than 2% of the total) are outstanding in U.S. dollars, Japanese yen and Swiss francs.
Þ The extent of retail (non-institutional) ownership appears to be small.
Þ 90% of the total is governed by Greek law. Only about €25 billion of the bond debt was issued under the law of another jurisdiction -- most of that under English law.
Þ It does not appear that the instruments issued under local law contain provisions permitting the holders to amend the terms of the bonds after issuance (other than to correct obvious errors or technical matters) – in other words, they do not appear to contain Collective Action Clauses.
Þ Greece does not appear to have included a negative pledge clause in its bonds issued under local law. Although Greek foreign law bonds do contain negative pledge clauses, they would only be triggered in bonds issued between 2000-2004 by the creation of a lien to secure a non Euro-denominated Greek debt.
Þ A payment default on a Greek Euro-denominated bond issued between 2000-2004, or the acceleration of such an instrument, would not have cross-default consequences across the rest of the debt stock.
According to Buchheit and Gulati, the fact that so much of the outstanding Greek debt is expressly governed by Greek law (90% or more, they estimate) is an incredible advantage should Greece restructure, as it raises the possibility that the restructuring could be facilitated in some way by a change to Greek law. This possibility is fraught with danger, however, and Buchheit and Gulati discuss mechanisms for minimizing those dangers.
The biggest impediment to restructuring, according to the authors, is the fact that such a large percentage of Greek debt is held by Greek institutions and European banks. In contrast, sovereign debt crises of the last 10 years or so have affected mostly non-bank creditors -- hedge funds, pension funds, other institutional holders of emerging market sovereign debt, sometimes even individuals. Those crises did not threaten the stability of the banking sectors in creditor countries (including the issuing country).
Buchheit and Gulati estimate that a Greek restructuring could be accomplished in six months -- perhaps less, if done efficiently. They propose an exchange offer under which the terms of the new instruments will be a function of the nature and extent of the debt relief the transaction is designed to achieve. If some of the emergency financing were to be used for this purpose, Greece might be able to enhance the attractiveness of the new bonds it would offer in the exchange through the use of credit enhancements.
The paper goes into great detail about all of this, of course, and draws lessons, analogies, and differences from prior restructurings, including Uruguay, Argentina, Mexico, Brady Bonds, Russia, and others. The wimpy authors are avowedly agnostic on the question of whether or not Greece should restructure, but if you’re looking for a roadmap on how this is it.
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Verge of the Unböring (The Modern Greek Drama, Part 3)