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Greek VoluntaryInvolutary DealNoDealDeal: Convolution Eupdate

posted by Anna Gelpern

Will Greece reach a voluntary deal with its creditors to write down its debt by 50% in the coming weeks? Will it default? ... or will its official patrons blink, pay up, and let the creditors off the hook? I hear at least two uber-expert Euro-watchers have taken opposite sides of the bet on that one. I bet nobody wins.

This Wall Street Journal article is rather optimistic, and somewhat incoherent on the trade-offs. Apparently private creditors are willing to take a lower interest rate in exchange for a change in governing law from Greek to English (and presumably the ability to sue in London/submission to jurisdiction) in the exit instruments--which makes some sense. But the piece then proceeds to equate English law with available collateral, which comes right out of nowhere. Emerging market sovereigns routinely submit to foreign law, but virtually no one puts up collateral. As a result, all can sue, but none can levy. Just ask Argentina's creditors, who just celebrated the tenth anniversary of the sovereign asset chase under New York, English, and all manner of other foreign laws. But if all it takes is a switch to English law, we have a deal. I doubt it is that simple.

The article is also muddled on the now-notorious business of collective action clauses and their implications for Greek Credit Default Swaps. Although the vast majority of Greece's debt contracts are under Greek law and have no amendment provisions, and although Greece could try to amend these by legislative fiat (risking lawsuits at home and in Europe), the dominant scenario appears to meld contract and legislation: pass a law that allows a super majority of creditors to bind the dissenting minority. The effect of such a law would be to retrofit majority amendment clauses across the Greek debt stock. If the majority binds the minority, the deal goes forward. (The treatment of Greek debt in official hands would be crucial here).

Such a move almost certainly triggers a credit event under Greek CDS contracts: the new terms would be "binding on all" creditors, which is the litmus test under ISDA documentation. Until now, avoiding CDS triggers has been the line in the sand for key official and private players in this drama. Hence the obsession with characterizing the deal as "voluntary." But if coersion is now on the table, why mess around with the inadequate 50% and contract-legislation hybrids? (I suspect the answer is Euro politics.) 

As an aside, the article suggests that major banks are lobbying against a credit event--does this mean that they are not hedged? ... that they sold CDS? ... to whom?

One split-the-baby scenario might be to pass the law grafting collective action clauses onto Greek bonds, but then to refrain from using the clauses to coerce creditors into the deal. Plenty of debtors who had collective acion clauses in their contracts did not use them for various reasons; however, the fact that the option was available might have helped creditors make up their minds. I think this route would be too cute to be seriously considered, but you never know.

Mitu Gulati and Jeromin Zettelmeyer have the only sensible take I have seen on the voluntary/involuntary dance: creditors will take a deep haircut voluntarily if they think the alternative is worse. The alternative could be a default, or another restructuring soon, and on nastier terms. Most sovereign restructurings until now have taken place in the shadow of default. In Greece, default was formally taken off the table at the outset for political reasons. But no one can eliminate the possibility of another restructuring--whether that one is voluntary or involuntary need not be decided today. All you need to know is that the next deal would be worse than the deal now on offer. Under the circumstances, the proposition seems like a no-brainer. Can it last?


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