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.
Related
Posts:
When
Will Greece Restructure?
Greece Gets Bailout: Are We Done Now?
The Greek Bailout: War Versus Dishonor
What Do Those Greek Debt Contracts Say?
Greece: Argentina, Uruguay, or Twin Engine
Plane?
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)