Any fundamental restructuring of Greece's US$350bn of outstanding debt before June 2013 will have severe repercussions across the Eurozone, according to the lawyer who advised Uruguay on the successful restructuring of its sovereign debt in 2003.
Lee Buchheit, partner at law firm Cleary Gottlieb Steen & Hamilton, will warn at a conference in Florence that a "full monty approach" without obtaining voluntary consent from bondholders would provoke "a major tremor...felt in Lisbon, Madrid and elsewhere in peripheral Europe".
Some 90pct of Greece's debt stock is governed by Greek law. The country's government could amend the bond contracts to reduce the amount to be repaid, the maturity dates and the interest. However, such measures would deter future purchasers of Greek bonds and contravene the bailout policies.
"Having spent billions of euros of taxpayer money to stave off any restructuring of Eurozone sovereign debt, will the political class in Europe really be prepared now to careen to the other extreme of countenancing a savage debt restructuring?" Buchheit will say on Thursday.
However, whilst such radical measures would be the quickest way to give the country a sustainable debt profile, Buchheit is expected to say that more subtle `voluntary' methods will be required to make Greece a credible issuer of debt again in the near future.
"If the creditors themselves elect voluntarily to participate in a liability management transaction to improve the creditworthiness of their debtor, who in the official sector can gainsay that decision?" asks Buchheit.
Such an exercise could replicate what took place with Uruguay eight years ago. All creditors were persuaded to accept an extension to their debt maturity, which nominally left the principal and coupons untouched.
Greece would have to introduce collective action clauses, or CACs, on its bonds to allow creditors to vote on such proposals and bind in minorities who held out against them. These could be 'aggregated' so only a single vote across all the bonds need be held. This happened with Uruguay.
However, Buchheit envisages that such an extension, which would still effectively reduce the net present value of the bonds, might test Greece's "powers of persuasion" without "adding credit enhancements".
CREDIT ENHANCEMENTS
Such enhancements might take the form of European 'Brady' bonds. These US-backed instruments were issued, under exchange offers in the 1990s, to creditors holding bonds of Latin American countries that had defaulted.
Greece could use the credit rating of its multilateral backers, principally the European Union via its various financial support mechanisms, to make an exchange into such new enhanced bonds more attractive.
But unless a fundamental haircut to the principal was given, such a "light dusting" of the Greek debt stock would not return it to a sustainable position. "Will it just be the first of a two stage restructuring with the real blood-letting deferred to stage two?" Buchheit will say.
Greece can use the 110bn euros of bailout funds borrowed from the EU and IMF to meet its obligations, before this starts amortising in June 2013. But after that date, when the European Stabilisation Mechanism (ESM) comes into action, its options will be more limited.
"More than half of the debt stock will by then be in the hands of official sector creditors (the EU, ECB and IMF), at least one of which claims for itself preferred creditor status. Will the private markets really be eager to resume financing a country in this precarious position?" says Buchheit.
The IMF has never agreed to a restructuring by its debtors and it is thought unlikely the EU will accept a restructuring of its part of the debts alone.
By this stage the outstanding Greek government bonds will effectively rank below the official sector debt. The bonds could be written down by the issuer but that would put creditors off supporting future Greek issuance.
"What effect would this have on future lending to Greece or, for that matter, to other Eurozone sovereigns?," says Buchheit. As such he believes a compromise might be reached involving all creditors agreeing to share the pain, if a restructuring was attempted after June 2013.
One way of getting the market to accept Greek bonds again would be credit enhance these bonds with ESM backing.
If the Brady precedent was followed, this would see Greece use some of its pledged bailout money to buy zero coupon bonds from the ESM to secure the principal Greece would issue. Investors would only take the risk of Greece defaulting on interest payments.
by Christopher Spink
source: IFR
