As regular Lounge readers know, Greece has been a popular
topic here of late (see links below) and with good reason: according to nearly
all sources, action is near — the only question seems to be, what sort of
action? According to Paul
Krugman:
The debt crisis in Greece is approaching the point of no
return. As prospects for a rescue plan seem to be fading, largely thanks to
German obduracy, nervous investors have driven interest rates on Greek
government bonds sky-high, sharply raising the country’s borrowing costs. This
will push Greece even deeper into debt, further undermining confidence. At this
point it’s hard to see how the nation can escape from this death spiral into
default.
Peter Boone and Simon Johnson of The
Baseline Scenario think that:
There are disconcerting parallels between Argentina’s
catastrophic decade, 1991-2001, which ended in massive default, and Greece’s
recent and impending difficulties.
The main difference being that Greece is far more indebted, is much less
competitive in global markets, and needs a commensurately greater fiscal and
wage adjustment.
But Felix Salmon thinks that Greece “won’t
go Argentine,” and asks:
There’s another option here, which I haven’t seen mentioned:
rather than Argentina 2001, why not go Uruguay 2002? Or at least somewhere in
the middle, like Ecuador 1999? Given the choice — and of course they have the
choice — I think that pretty much all politicians in Europe, including the
Greeks, would opt to avoid the Argentine precedent. . . .
Uruguay
is a case study in how a country can default in an elegant manner, use
financing from multilaterals to get it over a short-term hump, and then
refinance that debt in the public markets as liquidity and positive sentiment
returns.
Not knowing exactly what it meant to “go Uruguay,” I asked
the man who led Uruguay in “going Uruguay” — Lee
C. Buchheit, a partner based in the New York office of Cleary Gottlieb
Steen & Hamilton LLP — to put the Uruguay restructuring into the context
of Greece’s troubles. Buchheit,
who has generously guest
blogged with us here at the Lounge before, was the senior partner on
Uruguay’s restructuring, and wrote about the deal in “Uruguay’s Innovations,”
19 J. Int’l Banking L. and Reg. 28 (2004)
(with Jeremiah S. Pam); Spanish language version printed in La Ley (Supplement, “Default y
Reestructuración de la Deuda Externa”, Nov. 2003). [Don’t bother trying to locate this on the Cleary Website,
which is sufficiently unnavigable that its design might have been outsourced
to a major law school IT department].
Here is what Buchheit had to say on the matter:
Relocate Greece to the continent of Gondwana, give it back a
currency other than Euros and reconfigure its creditor base so as to reduce the
dangerously high exposure of European banks, and there seems little doubt that
a thorough debt restructuring would be in order. But the possibility of a debt restructuring is being
dismissed out of hand for a Euro-located, Euro-spending and Euro-indebted
Greece. Why?
The obvious answer lies in that tell-tale word
"Euro". And while this
is right, it is only partially right.
A restructuring of Greek debt might allow a worm of doubt to slither
into the heads of buyers of other European government bonds, and perhaps not
just governments located in the olive belt. That worm would inevitably consume basis points on future
bond coupons, but how many basis points and for how long no one can predict.
I do not believe that this fear entirely explains the reluctance
to consider a debt restructuring for Greece.
Since the commencement of the financial crisis in the fall of
2008, the official sector has not been prepared to risk aggravating the crisis
by forcing distressed sovereigns to restructure their debt as a condition to
receiving multilateral or bilateral aid. There have been many beneficiaries of this policy,
from Iceland to the Baltics to the Ukraine to Hungary. Had one of these countries encountered
its difficulties in more normal times, however, there is some reason to think
that its creditors might have been invited to participate in a
"burden-sharing" exercise (to use an almost quaint phrase).
The holders of Greek debt may similarly be sheltered from the
unpleasantness of a debt restructuring, not because it would be impossible to
restructure those instruments, but rather because the official sector remains
exceptionally leery of inflicting any new shocks on markets that are still
fragile and skittish.
Of course, if there is something approaching a return to
normalcy in the next 18 months, this security blanket may quietly and
insensibly slip off the side of the creditors' bed.
Uruguay in 2003 restructured ("reprofiled", to use
the precise term) all of its external and local bonds. Significantly, the restructuring was
not preceded by a payment default.
All of the affected instruments were current on payments when the
transaction closed on May 29, 2003, but Uruguay did not hide the fact that it
was within days of running out of money.
The "reprofiling" of Uruguay's bonds involved a
five-year extension of the maturity date of each instrument. Coupons were kept the same. There was no haircut to principal. So basically the transaction just
shifted the country's debt profile out by five years.
Did the fact of this debt restructuring keep Uruguay out of
the international capital markets?
Yes. For precisely 31 days.
Uruguay returned to the capital markets on June 30, 2003, and
it has been back 18 or so times since then.
In closing, I have to share with you another “Leeism.” I asked him about the The New
York Time’s report that European leaders sought “to quash any doubts about
their resolve to help Greece,” by offering a one-year aid package of up to €30
billion. Isn’t this so far
removed, I asked, from what Greece actually needs to make a go of it that it’s
just throwing money away? Why do
this? Do they really think that’s
enough? Or is this just a
political move designed to make it look like Europe actually tried to do
something, rather than standing by watching Greece tank? Is there something
here that I don’t see? In
response, Buchheit told me The Parable of
the Second Engine:
Some years ago my brother started to take flying
lessons. He trained on a
single-engine aircraft.
"But surely brother mine", I said to him one fine
day, "it is safer to train on a two engine aircraft in case one engine
stalls".
"Lee", he responded in that tone of voice employed
by all elder brothers when speaking to their siblings, "if one engine were
to stall in an aircraft being flown by an inexperienced pilot, there are so
many adjustments the pilot would have to make all at once that the utility of
the second engine will merely be to fly everyone to the scene of the
crash".
This 30 billion, and even perhaps the 30 billion after that,
may wind up performing the function of the second engine.
Related Posts:
Greece Updates:
You Can't Blame The Mirror For Your Ugly Face
Blame It On Derivatives, Blame it On Goldman
Sachs, Blame It On the Nazis. But Don’t Blame the Greek Crisis on Greece
The Greek Crisis: Economic Meltdown or Mental
One?
The Modern Greek Drama: Comedy, Tragedy, or
Both?
The Modern Greek Drama, Part 2
Verge of the Unböring (The Modern Greek
Drama, Part 3)
Is 2010 The Year of Odious Sovereign
Defaults?