Greek Debt Crisis — A Dilemma that Does Not Diminish (4/19)     Print

There is a new twist in the disconnect between, on one hand, official denials on all sides that Greece will ever default on its sovereign debt and, on the other hand, the near-unanimity from economists and analysts that some form of restructuring is inevitable.

In the last few days, the yield – meaning the cost for the borrower -- on 10-year Greek bonds has hit a new high of 14.3 percent. That development emerged in the wake of a comment by the German Finance Minister Wolfgang Schauble, raising for the first time from German officialdom the possibility of a restructuring for Greek debt. He alluded to a coming European Union study on the sustainability of Greek debt intended to guide Europe’s action on the issue. His comments seem to be a departure from the systematic denial by Berlin, the European Central Bank and the International Monetary Fund that there is any risk of a Greek default or restructuring that would penalize the banks or other lenders who have financed Greek national borrowing.

While it is not certain that the EU report, to be published in June, will conclude that restructuring is an alternative, one option that is getting increased attention is a plan that would ask bondholders to trade in their bonds for a new bond with a lower rate and longer maturity. (Such a "restructuring” is, of course, the polite term for “default” in the eurozone although restructuring can be more nuanced and structured than the walk-away bankruptcy triggered by default.)

Restructuring, if it occurred, would have the advantage of sharing the pain of the crisis more equitably. Currently, stringent austerity measures (and the increasing unemployment that ensues) are making the Greek people bear the brunt of restoring Greece’s credit-worthiness. Meanwhile banks and other lenders are reaping the rewards of Greece’s plight as interest rates rise – giving windfall profits to bond-holders.

The idea of a limited (but still painful) restructuring has been analyzed by Lee C. Buchheit, a lawyer at Clearly Gottlieb Steen & Hamilton in New York. He has worked on debt-restructuring deals over the years and says in a co-written paper that such an approach would be feasible in Greece. (See this update on Greek debt by same author.)

For one thing, Buchheit writes, Greece’s debt is mainly in the form of bonds and these bonds are overwhelmingly in the hands of institutional investors (as opposed to retail individuals) so the holders are  largely professionals who presumably are prepared to some degree to handle a write-down on the value of their holdings.

Furthermore, Greece has the advantage of having at least 90% of its bonds expressly governed by Greek law. Sovereign debt in most developing countries is issued under the law of the U.K. or the U.S. to make it more marketable. Because Greek bonds are issued under Greek law, Athens can tweak its regulations to apply “collective action clauses” on the bond contracts, modifying payment terms and forcing all lenders to accept them.

Buchheit writes that if a restructuring were undertaken, it could be done in five to six months — one month for preparation; a month or two for creditor consultation; one month during which the exchange offer would be in a marketing phase; and another four to six weeks to convene bond-holder meetings; finally, two to four weeks to prepare for a closing on the deal.

Any restructuring would, of course, raise obvious negatives -- including the overall impact on the euro and the specific impact on bond-holding institutions that would have to submit to the “haircut.” It is an open question how long it would take for Greece to regain the ability to raise money.

But thinking the previously unthinkable seems to have started, apparently as more people conclude that a well- managed restructuring may be the least bad available alternative under the circumstances.

-- European Affairs