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
Related Posts:
Should
Greece Bail Out Germany?
Austerity
And "Punishing The Shorts"
Euro-TARP Love Fades
Don't Let An International Crisis Go To Waste
Γκελπερν v. Gelpern: Unformidable Opponent,
Greek Edition
Should Greece Restructure? The Debate
Continues
Buchheit and Gulati on How To Restructure
Greek Debt
When Will Greece Restructure?
Greece Gets Bailout: Are We Done Now?
The Greek Bailout: War Versus Dishonor
What Do Those Greek Debt Contracts Say?
Greece: Argentina, Uruguay, or Twin Engine
Plane?
Blame It On Derivatives, Blame it On Goldman
Sachs, Blame It On the Nazis. But Don’t Blame the Greek Crisis on Greece
The Greek Crisis: Economic Meltdown or Mental
One?
The Modern Greek Drama: Comedy, Tragedy, or
Both?
The Modern Greek Drama, Part 2
Verge of the Unböring (The Modern Greek
Drama, Part 3)
Is 2010 The Year of Odious Sovereign
Defaults?