pago non pago?
The Fund, arrears, and Greek holdouts
Posted by
Joseph Cotterill on Mar 27 08:35. So it turns out that we won’t know, for a little while longer, who the holdouts are in Greece’s foreign law bonds – a remaining pimple on the bottom of its debt workout.
Greece has pushed back the deadline for foreign law bondholders to agree to a debt restructuring to April 4, as
IFR reported on March 23. The deadline was meant to be March 23.
While we all twiddle our thumbs, here’s some (really quite dull) IMF boilerplate:
You can find almost exactly the same wording in any IMF report on a country bailout; the above text just happens to be ripped from the
latest one on Greece. It means that, usually, the Fund is banned from lending to a sovereign which is getting deeper into default on external debts by not paying them off.
On rare occasions the IMF can ‘lend into arrears’ when a sovereign is in default, but is negotiating a settlement with bondholders. But it’s not normal.
No lending into arrears in the IMF’s €28.6bn share of the second Greek bailout, of course. The Fund doesn’t think there will be any arrears, because it currently doesn’t see a financing gap in the bailout to cause them. (At the very least,
it has a plan if or when a black hole does emerge). No financing gap for now. That’s important.
But a bit dull, so far. So here’s the reason we bring it up…
What might the IMF do in April, if Greece has to deal with (and possibly default on) investors who do hold out from restructuring its foreign law bonds?
Would those arrears be OK with the IMF’s ‘normal’ rules? The question was asked by Gabriel Sterne, economist at Exotix, in a note last week.
This isn’t something we’ll know for a while, but it is worth asking. There’s also an interesting question here about economic upside in the Greek restructuring.
First, some background on holdouts
Some
69 per cent of these holders have
already said they will tender into the exchange.
You could say, “well, that number doesn’t make holdouts very likely, does it” but there is a quirk here in these bonds’ collective action clauses, which allow a majority of holders to vote to make a change of terms binding. Greece’s domestic law bonds were all assigned the same CAC before the restructuring, with the same threshold for a binding vote. The foreign law debts all have their own unique CACs with differing rules between each… so “triggered or not” becomes a bond-by-bond question. If a CAC isn’t triggered, it becomes
possible to hold out (because there’s no
sudden death of being bound by other holders).
We go into the CACs at some length because they already present an obstacle to being sure of holding out, never mind the economic merits of the trade.
Assuming it’s possible, it’s
profitable to hold out on the foreign laws, based on whether you are correct that the Greek threat not to pay out on the foreign law bonds is an empty one. Instead Greece has the economic assets and
the inclination to pay you at par, or negotiate to somewhere between your purchase price, and par.
The threats have been that the Hellenic Republic ‘does not contemplate the availability of funds’ to pay them after PSI, and also that there shall be ‘no further opportunity’ for holdouts to benefit from the credit enhancements of the new bonds after the offer closes. Bluntly, how onerous will it be for Greece to service holdout foreign law debts and not make good on these threats, versus having to make fewer budget cuts, etc.
Back to the IMF
But whose inclination to pay matters? According to Sterne, it might be the IMF:
The IMF/Troika and Greece will need to conduct a cost-benefit analysis of whether or not it is worth paying out the bonds. We think ongoing DSA will be a key determinant of IMF attitudes. A key consideration is that it would be very uncomfortable for the IMF to sanction a build up of external arrears in the case there were no identified financing gaps in the programme.
It is feasible that the IMF could continue to lend to Greece while arrears are building up, in accordance with its lending to arrears policy, by which it could lend to Greece so long as there was evidence that Greece continued to negotiate in good faith with outstanding creditors. See any recent IMF review of its Iraq programme for examples of text that were included to justify lending in spite of Iraq continuing to be in arrears to creditors such as the Kuwait government. For example the following statement is included in the
March 2011 second review of Iraq’s programme.
“Staff furthermore believes that Iraq continues to make best efforts to reach bilateral agreements on its arrears to non-Paris Club creditors and that the authorities have been negotiating in good faith to resolve the remaining arrears to private creditors”
But if the IMF does not identify financing gaps in the programme, then in our opinion it is difficult (though not impossible) for the Fund to justify allowing Greece to build up arrears. So, in our judgment, if the programme stays on track, then we think there is a strong likelihood of hold-out on foreign law bonds being paid eventually.
Two things jump out here. First, it
is about economic upside; Sterne also says there’s more value in Greece’s GDP warrants (growth-linked securities attached to the new bonds) than
generally thought.
Second, though, this might be another area where the IMF ends up thinking very differently to its fellow official creditors. Lending into arrears is one of those Fund functions which isn’t taken very lightly.
All of this assuming, of course, that holdouts emerge on April 4.
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