In light of the decision taken last week in Brussels to impose a 50% (nominal) haircut on that portion of the Greek debt stock still left in the hands of private creditors, the post below, from April 2010, makes for interesting reading.
April 26, 2010
The Greek Bailout: War Versus Dishonor
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
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