'Voluntary' Greece Deal Seen Overstated
Experts Say Little Difference Between Debt Exchange Agreed in Talks, or One Imposed on Bondholders
By STEPHEN FIDLER
The issue of whether Greece's debt restructuring is "voluntary" or "coercive" is widely depicted as being critical to financial markets. In fact, there may not be a lot of difference, experts say.
The Greek government and representatives of investors in government bonds are locked in talks as a deadline looms: March 20, the day that €14.5 billion ($18.7 billion) of bonds come due.
By then,
a host of complicated legal steps must be taken to give bondholders time to sign up to exchange their old bonds for new. If a deal isn't struck soon, says the Institute of International Finance, which is negotiating for bondholders, a voluntary accord may be impossible.
The result, it says, would be a messy default on €200 billion of government bonds and financial contagion across Europe. That would be worsened by the triggering of payouts on credit-default-swap contracts, a form of insurance against a bond default.
There is no predicting how the financial markets are going to react to such events.
But many analysts are skeptical that there is a vast difference between a "voluntary" debt exchange agreed with the institute and one imposed on bondholders without its agreement.
Adam Lerrick, a U.S.-based expert in sovereign-debt restructurings, says
the prospect for a true voluntary deal "disappeared in the rearview mirror months ago."
"Bondholders are trying to frame the discussion as 'voluntary versus disorderly' to frighten the official sector," he says. "That's their sales pitch but it's not true.
Coercive restructurings can be perfectly orderly."
What then would be the difference between an exchange mandated by the institute and described as voluntary—and one that isn't?
Part of the answer hangs on how many bondholders would change their decisions because of an institute endorsement.
It isn't clear what percentage of the €200 billion would be influenced by an institute imprimatur—some estimates suggest 60% to 70%.
A large proportion of these would in any case be European banks and other investors subject to "moral suasion"—the euphemism for pressure by national authorities. They would likely go along whether the institute is on board or not.
But over the past year, the universe of bondholders that is members of the institute and susceptible to "moral suasion" has shrunk. They have sold their bonds to
hedge funds and other investors that aren't.
The strategies of this group are likely to be little different whether a restructuring has the institute's backing or not.
In a "voluntary" deal, many will hold out. Yet, the deal hangs on ensuring that Greece's debt is reduced to the still-high target of 120% of gross domestic product by 2020. That requires all private bondholders to be involved.
If they don't agree, the holdouts will have the "voluntary" deal forced down their throats. The Greek government has given warning that it stands ready to "retrofit"
bonds issued under Greek law—that's around 93% of the total—with so-called collective-action clauses. The clauses would essentially allow the deal to be forced on holdouts.
Several hedge funds have already threatened to sue if they are forced into a deal. Michael Waibel of the Lauerpacht Centre for International Law at Cambridge University says
their first recourse would have to be to Greek courts—unlikely to be very sympathetic—and possibly to the European Court for Human Rights if a case can be made for strong interference with the contractual rights of bondholders or expropriation. But, generally,as a holder of these bonds, he said: "I wouldn't put my faith in legal remedies."
Mr. Waibel also points out that
the Greek-law bonds have no so-called pari passu clauses that insist on equal treatment of bondholders. This suggests the government can give special treatment to the bonds held by the European Central Bank, as is planned, without drawing lawsuits.
The small minority of Greek bonds issued under Swiss and English law carry pari passu clauses. Suits by holders of these bonds might be more successful. Mr. Waibel says that
Russia,
in a similar situation to Greece, followed its 1998 default by forcing fierce write-downs on holders of bonds issued under Russian law while continuing to service the minority of bonds under English law.
Even successful legal judgments may be hard to enforce. Mr. Waibel's book "Sovereign Defaults Before International Courts and Tribunals," says that nonparticipating creditors in Argentina's coercive 2005 debt restructuring—at 30 cents on the dollar—filed 140 individual lawsuits and 18 class-action suits in the U.S. and obtained judgments totaling $6.4 billion. How much have they obtained as a result? "Not very much," he says.
One other bugaboo is the claim that a coercive deal would trigger payouts on credit-default swaps. That is indeed true. Under a truly voluntary deal, payouts wouldn't be triggered. But, Mr. Lerrick says that
holders of CDS insurance have strong incentives to refuse to agree to the deal—so that when they are coerced into it they can claim their payouts under CDS.
There thus seems little difference in outcomes whether a deal is described as voluntary or not. A coercive deal may be orderly; a large proportion of investors will sue in either case, perhaps with little real hope of redress; and credit-default swaps payouts will be triggered under both scenarios.
.....finche' c'e' vita c'e' speranza
