Great spot by John Dizard — an appointment to raise eye-brows:
Last week, it was announced that Cleary Gottlieb, the New York headquartered international law firm, had been engaged by the Hellenic Republic. I believe this tells us a lot about the direction euro area finance will take… the Cleary team working on Greece will be headed by Lee Buchheit, the partner who has previously represented Iceland, Argentina, etc, etc. Trusted by distressed governments, cursed by former optimists with long positions, his is the mobile number of choice for sovereigns that believe they have unsustainable debt burdens.
Now, Greece’s biggest legal task right at this moment is to ensure that bondholder participation in the IIF-sponsored exchange will take place broadly, and voluntarily. Hopefully with a modicum of litigation from investors. Cleary Gottlieb Steen & Hamilton are an impressive choice for that in any case. They’ve been consulted by Greece’s official creditors previously in the crisis.
It’s an interesting choice to make explicit, however, given a frank set of papers penned by Lee Buchheit and his co-author Gaurang Mitu Gulati in the fateful months of May 2010 and April 2011. Things called ‘How To Restructure Greek Debt’ (2010) or ‘Greek Debt – The Endgame Scenarios’ (2011). They do tend to stick out.
It’s worth reading their arguments again in light of the new appointment…
First, what the 2011 paper called a “light dusting” (an exchange of maturities, with little cut to NPV once collateral gets factored in) mostly came true in the offer the market eventually received. The authors even predicted the drawbacks pretty well, noting that the credit enhancement would be costly while the NPV reduction would be so light as to make investors wonder when the real (in their words) ”full monty” haircut would happen.
So since Buchheit got that bit right, we think Dizard is on to something when he reckons a “Mopping-Up Law” might be on the agenda soon. It’s an idea from Buchheit and Gulati’s original 2010 paper, based on the observation that almost all of Greece’s government bonds were issued under Greek law:
No other debtor country in modern history has been in a position significantly to affect the outcome of a sovereign debt restructuring by changing some feature of the law by which the vast majority of the instruments are governed.
Therefore the Greek parliament could, and at any point it chose, simply legislate to force bondholders into a haircut — credit event triggers be damned! — though Buchheit warned how opportunistic this would look, not to mention the precedent that would be set in Greece and elsewhere in the periphery. Bondholders would have nightmares of the parliament voting in a Law for the Restoration of the Drachma as its next act…
So the authors argued that Greece might instead get bondholders to do half the work themselves, by adding a ‘statutory collective action clause’ to the Greek law debt. That is, an exchange becomes binding on all holders by law, as soon as (but not until) two-thirds or so vote for it.
There’s all to play for as to whether the current financing offer gets the 90 per cent participation rate by September. If it were to fail, a retroactive law change would be messy and there’s no suggestion it would be the first, or second, or third, fall-back option. There are alternative routes, such as executing another exchange. But it is not inconceivable. Not a thing you could trust the eurozone to swear off anyway. Debt crisis is the sphere of logics of consequence, not logics of appropriateness. Greece CDS sellers, bond hold-outs, beware, we would argue.
One last thing. Cleary Gottlieb also worked for Argentina during its 2005 and 2009 debt exchanges following the 2001 default. In both exchanges, proceedings were complicated by a legislative act which bound creditors — the 2005 Ley Cerrojo (padlock law).
Nice sovereign restructuring curio, this. The law froze the terms of the 2005 exchange and disallowed future exchanges that offered better terms. Harsh stuff, given the 2005 offer provided that no compensation would be made to holdouts! A portion of the law was suspended for the 2009 offer to go through — again, the logic of consequences trumps appropriateness — but the principle helped Argentina “incentivise” investors, as much as hindering it through drawing out restructuring. To emphasis, few would wish to repeat Argentina’s experiment by choice. Few apart from Greece are in a similarly dire situation as Argentina found itself, though. It’s all up to the Greek government, not its legal advisers, what they do in the long run in any case.
But again, what price a Greek holdout over that timeframe?