Academic

How Would Greece Restructure Now?

By Kim Krawiec

 A few weeks ago, we 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??  After that, I provided the ?how,? as explained by Lee Buchheit (Cleary Gottlieb Steen & Hamilton) and Mitu Gulati (Duke, law) in a paper recently posted to SSRN.  Since then, as we?ve discussed here and here, the European Central Bank has purchased about ?26.5bn of government bonds in the past two weeks, and is anticipated to buy more.  A few days ago, in Should Greece Bail Out Germany?, I asked what impact these ECB purchases might have on the possibility and mechanics of a Greek debt restructuring. 

Today, frequent guest Lounger (see here, here, and here for prior posts) and sovereign debt expert Lee Buchheit is back with some answers:

The ECB's decision to buy Greek (and other Club Med country) bonds for its own account is significant for several reasons. 

First, they now have the wolf firmly by the ears.   If the ECB suddenly stops buying (or even starts selling), the market will know instantly and that could start a stampede.  But if they must continue buying, where and when does it stop?

Second, if a restructuring eventually comes to pass, what posture will the ECB take with respect to the bonds it owns?   Will it, for example, try to claim preferred creditor status (like the multilateral financial institutions), or perhaps argue that its contribution at this stage was the functional equivalent of debtor in possession (DIP) financing that deserves a priority in any restructuring?

If the restructuring starts in, say, nine months, the Greek debt stock will look significantly different from today.  The IMF money will be senior and exempted from the restructuring.

The bilateral money coming from the EU members may also try to claim a preferred or semi-preferred status.   It is, after all, one thing to jolly German parliamentarians into approving a bailout package, it is something else again to go back to them nine months later and announce that the package is being given a haircut.

And then there is the status of the ECB as a bondholder.   Will it go gentle into the good night of a debt restructuring, having bet the bank (literally) that one could be avoided?

If all three groups try to assert a preference in the restructuring, that will inevitably force the remaining bondholders to accept much harsher terms.   The danger now is that those other creditors may begin to see themselves being quietly subordinated with each Euro disbursed to Greece under the bailout package, and with each Greek bond purchased by the ECB.

That perception alone should ensure some continued selling pressure.

Third, in any restructuring the ECB is likely to be the single largest creditor.   This will give it significant voting power in bond syndicates with collective action clauses.

-- Lee C. Buchheit

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Full post as published by The Faculty Lounge on May 28, 2010 (boomark / email).