As I noted in my
last post on this topic, this week will be an important one for the
European monetary union. So I asked
the Lounge’s informal counsel of sovereign debt experts for their views on what
sorts of questions we should be asking now that Greece has asked for aid, and
the market still appears unappeased.
Mitu Gulati (Duke) started
us off by asking some pointed questions about the terms of the Greek bond
contracts, arguing that, when times are good no one cares about the
contracts. But, he says, things
look bad enough now that these issues should matter to debtholders (and to
Greece). Below, Lee C. Buchheit, a partner based
in the New York office of Cleary Gottlieb Steen & Hamilton LLP, joins the
fray:
At this point, it is worth asking how the "no debt
restructuring" scenario is supposed to play out.
Is the theory that Greece will draw down on the EU/IMF
bailout money to cover maturing debt obligations and budget deficits while the
fiscal adjustment takes hold and, at some point in the not-too-distant future,
the markets will be prepared to resume lending at moderate coupons?
If so, a couple of observations:
The bailout fund will need to be larger than EUR 45
billion. Once the country starts
suckling on the bailout fund, it may be some time before it can be weaned.
The market's nostrils are visibly flaring with the whiff of
debt restructuring on the air.
They will not, I suspect, be easily or quickly persuaded that the crisis
has passed.
The worst case scenario here is one in which the bailout
money is exhausted in an effort to "brass it out" (as the English
say), only to find that a debt restructuring cannot in the end be avoided. Why? Because those resources might have been used in some
creative way to facilitate the debt restructuring (remember Brady Bonds?), or
at the very least to backstop the local deposit insurance scheme or
recapitalize local banks that are adversely affected by the restructuring. A sovereign debt restructuring
with no fresh money behind it is both a harder and an uglier thing to complete.
This then is the dilemma of the moment. Should the bailout money be spent
paying maturing debt obligations in full and on time until it is exhausted, or
should it be husbanded and used to support a debt restructuring of some kind?
One is reminded of Winston Churchill's verdict on Neville
Chamberlin's policies in 1939:
"You were given the choice between war and
dishonor. You chose dishonor and
now you will have war".
— Lee C. Buchheit
Related Posts:
What
Do Those Greek Debt Contracts Say?
Greece Trouble Deepens
Greece: Argentina, Uruguay, or Twin Engine
Plane?
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?