Today’s
Brussels Beat column pointed out that the bigger the losses bondholders are forced to suffer in a restructuring, the less sense it makes to call it voluntary.
It suggested that a so-called “voluntary” restructuring for Greece negotiated by the Institute of International Finance would probably end up by triggering payouts on credit default swaps and a bunch of (mostly unsuccessful) lawsuits, as would any coercive exchange. Moreover, “coercive” exchanges did not have to be disorderly.
I’ve had some correspondence since from people who don’t agree. Here’s one view:
“Isn’t the difference between what happens with a voluntary approach and a coercive one the difference between Uruguay and Argentina? The latter still has no real market access after 11 years and counting. Coercive forced by IMF/EU means they have to finance Greece for a LONG time…”
He continued that Russia–which forced its bondholders to take big losses after its 1998 default
“can borrow again because a) it has many tons of oil and b) devalued its currency on default. Give those to Greece and I’d step up to lend in a year or two.”
But, wrote I, in response: “The haircuts on Uruguay were 5-20% and those on Argentina 70%. The deeper into haircut territory you go, surely the ‘voluntary’ fig leaf becomes less supportable.” The Greek haircut is 50%–meaning the bonds’ face value is cut in half.
There’s also the question of whether the holdouts will be forced into the deal. It’s true, as another correspondent pointed out, that if the deal is really voluntary and it doesn’t bind all holders of the bonds, payouts under credit default swaps probably wouldn’t be triggered.
However, if the rest are subsequently forced into the deal to make the sums add up, as many analysts consider likely, then CDS payouts are likely. The more bondholders accept the deal, however, the smaller the benefit of forcing in the remaining holdouts, however. There is an acceptance rate at which leaving free riders to free ride becomes the lesser of the evils
Here is another correspondent, writing about the impact on the European Central Bank and its Secondary Market Program:
“You omit an important aspect of the problem. The ECB wanted a voluntary deal so that it could continue to claim that Greece did not default, that its SMP holdings are not special, and that the ECB does not accept defaulted bonds as collateral. All that is gone with an involuntary deal. The precedent will be set for subordination of private sector bondholders to the ECB SMP holdings in Portugal, Ireland, and beyond. This will undermine the effort to induce the private sector to return to the [peripheral government bond markets].”
This is indeed an issue I omitted to discuss. You could say the ECB is sustaining a fiction if it argues the deal is voluntary at a 50% haircut and even deeper writedowns for financial institutions, but that’s not really an argument. Here’s part of my response. D stands for Default and SD for Selective Default:
“Even if the holdouts are not forced in and the deal is ‘voluntary,’ the ratings agencies will declare Greek bonds D and Greece SD or D. (That’s because some bondholders are worse off as a result of the exchange.) There is the assumption that the SD state will not last for very long—so the other euro zone governments can step in provide alternative collateral for this short period.
“I think for the coerced exchange to be worse from an ECB standpoint, you have to assume that a Greece D rating [for an enforced deal] will be in place longer than a Greece SD rating [for a voluntary deal]. I have no idea whether this in fact would be the case. In fact, under a coerced deal Greece’s debts would presumably be lower and Greece better able to sustain them—but I’ve no idea what impact this would have [on the duration of the default rating.]“
