Feb. 23 (Bloomberg) -- Greece’s proposed bond swap could face a legal challenge over the retroactive imposition of a forced writedown, with New York City’s 1975 near-bankruptcy as a precedent, according to High Frequency Economics’ Carl Weinberg.
New York at the time passed a law to unilaterally suspend state bond and interest payments, Weinberg said. That law was overturned and deemed unconstitutional because public bonds are backed by the “full faith and credit” of the U.S. government, he said. A federal government loan later helped the city avoid default.
“Every constitution in the world has a clause in it that says if the government borrows money, they’re going to be good for it,” Weinberg, founder and chief economist at High Frequency, said today in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “The precedent in this case is to argue that governments can’t unilaterally, or at their own whimsy, change the terms of bonds on bondholders.
It’s one possible monkey-wrench in the process.”
Greece’s Parliament today approved a law to permit the exchange of Greek debt with private bondholders, Acting Speaker Anastasios Kourakis said in statements carried live on state-run Vouli TV. The law includes collective-action clauses that can enforce losses on bondholders if activated.
Even if the Institute for International Finance, which has been negotiating on behalf of private creditors, said all bondholders are ready to go, Weinberg said, “there is a basis for a few malcontents to raise their hands and say this isn’t fair play, retroactively imposing collective-action clauses on bonds.”