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From the Vault: Lee Buchheit on "How to Restructure Greek Debt" Videos

posted by Mitu Gulati

My sovereign debt class is discussing the March 2012 Greek debt restructuring on Tuesday afternoon.  The magic here was in significant part the product of Lee Buchheit's genius. That said, I do not wish to discount the contributions of his star studded team, which had debt gurus like Andrew Shutter and Andres de la Cruz who played invaluable roles.  

In class, we are thinking a lot about how Lee used the "local law advantage" in Greece. The reason being that we are (to put it mildly) somewhat focused on strategies that could be used to get Italy significant debt relief in the midst of this current crisis -- especially if the ECB drops the ball in terms of providing adequate financial assistance.  Lee just announced his retirement, a few months ago. I'm hoping that he comes back out of it. (Hopefully, we can get him to answer questions via zoom on Tuesday).

From the vault, here are some amazing videos of Lee from both before and after the March 2012 restructuring. They are amazing because they give us a sense of how his thinking evolved as his strategy moved from a hypothetical thought experiment that had no chance of being implemented to the one plausible strategy left on the table.

Videos:

Lee – Plan B (June 21, 2010) (Pre Greek Restructuring) – start watching at 20 minute point in:

https://www.youtube.com/watch?v=w8Zvfn3DjdY

 

Lee -- The Options Now (in the wake of the Greek debt restructuring) (Nov. 6, 2012)

https://www.youtube.com/watch?v=Q6G14SF4-sQ

 

The Options Now (Part II) (Q&A)

https://www.youtube.com/watch?v=e8bBWbKCdT8&t=26s

 

Lee, with an introduction by Ugo Panizza -- European debt restructuring/Greece (and some talk of Argentina) (Nov. 26, 2013) 

https://www.youtube.com/watch?v=nLZrTzvNBT0

Comments

1) Mr Buchheit talks about how retrofitting CACs in sovereign bonds governed by local law is a way of avoiding "going nuclear" on the creditors. Could this process be used to affix some kind of really low CAC threshold that the creditors would still consider "going nuclear" and engender the kind of instability he wants to avoid?

2) What stops larger hedge funds from gaining blocking positions even when the borrower has the benefit of a brand new CAC?

3) Should there be a SDRM to ensure more uniformity to the outcomes in sovereign debt cases?

I am curious why Greece couldn't take a more aggressive approach with the local-law governed bonds. I note concerns that this would deter future lending to both Greece and other similarly-situated smaller EU debtors, but it seems history has shown that creditors eventually (usually fairly quickly) forgive aggressive/unethical behavior by sovereigns. I'm not advocating for complete repudiation etc. but it seems to me that caution here is driven by Greece's participation in the EU/involvement with the ECB. Could something more drastic have been proposed if they were a more standalone economy? We have discussed the doctrine of odious debts and (though maybe inapplicable here) I could really see it gaining traction in a restructuring governed by local law.

1. Would Italy benefit from using a similar restructuring strategy like Greece's local law advantage in light of Italy's current situation regarding the pandemic? Do you think that the benefits of using such a strategy outweigh the costs in this situation?

2. Why do markets so easily and quickly "forgive and forget" in restructuring situations like Greece's? When using the local law advantage, what are some strategies to increase the likelihood that markets will forgive the sovereign and still lend to it in the future?

1. Mr. Buchheit mentioned the possibility of manipulating the yield of the country’s bonds on the secondary market so that the country can come to the primary market and say that since the yield is trading at X %, we could issue a new one at the same rate rather than a higher rate. I am curious how exactly this "massaging" of the yield rate can be done.

2. When designing a restructuring plan, it seems like there is a trade off between how aggressive the plan is and the vulnerability to the holdout problem. A re-profiling of the notes (only stretching out maturity with no change on principal & coupon) might be less vulnerable to a holdout problem compared to a more aggressive approach? How do we then balance the two? And is there a formal approach (maybe with some math?) to decide what approach is enough for a country?

1. What factors, legal or non-legal, affect what is "too far" when it comes to wielding the local law advantage? As above questions have mentioned, markets seem relatively quick to forgive and forget, and rarely (if ever) are sovereign shut out from international capital markets indefinitely. What's the point of the local law advantage if you can't use (or abuse) it?

2. I may have missed it, but a breakdown of different strategies using the local law advantage to different, a spectrum, if you will, would be very helpful.

2. Typically, what types of credit worthy parties are going to be incentivized to step in and facilitate a continuing "put" on exchange instruments? Presumably, the only time holders would use the "puts" would be when it's a bad deal for the buyer. Who are these parties and what do these arrangements look like?

I wonder what lessons could Lebanon learn from Greece -- local-law advantage would play different in Lebanon because it cannot change the financial terms in the local law restrospectively. But would this be a point of negotiation for the Lebanon government?

1) Following up on some of my classmates' questions about the extent to which a sovereign may yield its local law advantage, what legal principle constrains the sovereign from enacting aggressive legislative measures? In other words, if enacting such measures is not forbidden by the contract, on what legal basis could a court find such measures to constitute a breach?

2) If a country has a constitution or BIT that protects against expropriation without compensation, how is compensation to be determined in the sovereign bond context? If a country's bonds are already trading for cents on the dollar, wouldn't the market price be the best indication of the bonds' value and, accordingly, the compensation that is due to the bondholders?

To clarify my previous question -- even if we argue that Lebanon does have a local law advantage given its pari passu clause (the language on the bond can be subordinated by "other than any Indebtedness preferred by
Lebanese law") -- I wonder how should the Lebanonese government utilize this tool? And what are some of the risks using it?

I think what makes Italy's debt distinctive is that big amount of the public debt stock is held by the domestic banks and domestic financial institutions. Therefore, what particular strategy should Italy follow, although its position seems to be similar to that of Greece because they both have local law advantage. What should it do to reduce domestic political and economic negative impact of a debt restructuring? I am pretty sure the last thing Italy would want in this covid-19 era would be to hurt its domestic institutions which in turn would hurt the economy itself. It looks like -from Italy's standpoint- that it is in a better position than Greece since the majority of its bonds lacks the shield of acceleration clauses, cross default provisions, waivers of immunity, and consents to jurisdiction which mostly sweeps away the worries about enforcement by holdouts.

I am wondering whether the governments of other EU members opposed to the use of the local law advantage legal strategy for Greece, in particular, based on concerns on how that could backlash on their own bond yields (if governed by local law)?

I was surprised to read in Zettelmeyer, Trebesch & Gulati (2013) that when Greece announced the outcome of the March bond exchange, 61% of foreign-law bondholders accepted the offer compared to 82.5% of the holders of Greek debt issued under domestic law (and thus subject to the "local law" effect.) Is this proof that the local law effect was not itself (overly) coercive and that the bondholders were in fact able to vote on the merits of the deal?

If so, what is the "ideal" participation rate that would prove that the offer was neither coercive nor that Greece had left money on the table?

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