Yesterday, in How
Would Greece Restructure Now?, I asked Lee Buchheit (Cleary Gottlieb Steen & Hamilton) to
summarize the possible impact of the European Central Bank’s recent €26.5bn
government bond purchases on the possibility and mechanics of a Greek debt
restructuring. Today, frequent
guest Lounger Anna Gelpern (American, law) –see here and here for previous posts– chimes in
with her thoughts on the issue.
If the central banks are untouchably senior, if ECB and the other central banks become dominant holders of Greek debt, and if the German banking problem is not fixed, plus Greece takes on a ton of old-fashioned senior debt (IMF) … then there is not enough blood to be squeezed from the remaining bondholder stone. Therefore, restructuring becomes less likely. Buy the bonds for the same reason foreigners bought Boden, Argentine domestic debt held overwhelmingly by Argentine banks—the government was at the time credibly committed not to sink its banks (for its own domestic political reasons). Then we keep treading water until Axel Weber takes over the ECB and in the Nixon-Goes-To-China mode, stops sterilizing and starts printing money. The Euro drops (unless today’s market is pricing total Euro disintegration, in which case the Euro would go up because printing money is an exit from uncertainty), European exports of cars, shoes, and yogurt skyrocket; European center and periphery do a dance of unity as Detroit sinks. If I were investing in Greek debt, I would try to figure out just how much debt is held by preferred and non-preferred creditors. There may be a point where I could free-ride on the preference.
A separate point—since others on the Euro periphery are or are about to be in the same boat, official creditors would face tricky political questions of equal treatment. If you go all out to prevent a Greek restructuring (for example, because all debt is with the ECB), could you ever force a haircut in Spain? This brings up the poor country analogy. Poor countries’ creditors were overwhelmingly official, and when too much debt was senior multilateral plus Bono and the Pope got involved, there was a big concerted trip to the barbershop (HIPC/MDRI). This leads to the opposite conclusion from the preceding paragraph, and makes me think that a formal debt restructuring mechanism in Europe is more likely than I had previously thought.
And at another extreme, if it is true that Greek banks are big buyers of CDS protection, say, from the Norwegian sovereign wealth fund, Greece has a new incentive to default – its insolvent banks have one of the few good counterparties left standing, burden-sharing heaven. This seems a little counterintuitive—banks shorting their government? But then again, local capital flight often leads crisis outflows. Even so, the total volume of CDS outstanding is too small to plug the Greek banking hole. So …
-- Anna Gelpern
Related
Posts:
How
Would Greece Restructure Now?
Should Greece Bail Out Germany?
Austerity And "Punishing The
Shorts"
Euro-TARP Love Fades
Don't Let An International Crisis Go To Waste
Γκελπερν v. Gelpern: Unformidable Opponent,
Greek Edition
Should Greece Restructure? The Debate
Continues
Buchheit and Gulati on How To Restructure
Greek Debt
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)
Is 2010 The Year of Odious Sovereign
Defaults?
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