What Greece Can Learn From Defaulting Companies
Staff Writer, CNBC.com
The list of corporate restructurings needed during the credit crisis already resembles "War and Peace" in length. Now, entire countries such as Greece seem to need restructuring.
What are the main differences between restructuring a country and a company? And how can the hapless politicians and central bankers attempting to make struggling economies work learn from corporate restructuring?
Of course, the most difficult aspect of restructuring a country as opposed to a company is that, in general, shareholders and employees are less prone to taking to the streets and thumping policemen than aggrieved populaces.
Greece’s Prime Minister George Papandreou faced resignations from within his government and escalating violence on the streets of Athens Thursday.
"With a company, you make cuts, you get a repayment plan, you suspend dividend payments and so on, and enforce it with covenants," Richard Heis, restructuring partner at KPMG, told CNBC.com Thursday.
"With a country, you can make a plan with your creditors, and say that you'll run the country in a fiscally responsible way, but if you have a situation where you can't make it stick, when you have people taking to the streets, then that's going to circumscribe what you can achieve."
Papandreou's plans for tax hikes, spending cuts and selling off state assets, part of the bailout terms agreed with the International Monetary Fund (IMF) and the European Central Bank (ECB), seemed to be in jeopardy.
"Corporations can restructure relatively quickly: look at costs, fire people and sell assets. Countries aren't able to do the right thing sometimes," Michael Donogue, President of Phoenix Investment Advisers, told CNBC Thursday.
For creditors of countries, the main worry is that the government may rewrite their laws. There is no set process like Chapter 11 when countries go bust.
"Most countries have a restructuring regime, but if the country itself goes bust, that regime may not apply," Heis said.
"There are two major issues: the law governing the debt and the currency.
"If you're a creditor to a country, and the contract under which your money is owed is subject to local law, the government can change the law, which may significantly reduce your rights as creditor,” he added.
"The other thing is that movements in exchange rates can completely change the value of your debt if it is in local currency."
Countries that are on the verge of defaulting on their debt are also likely to have weak exchange rates. Historically, this has meant that governments have been able to print more of their already devalued currency to repay creditors, which is not good news for those creditors.
Of course, this is not an option which is open to Greece, or to any of the other eurozone countries, such as Ireland and Portugal, which have had recent financial difficulties.
"The real game-changer with Greece and other eurozone countries is the euro," said Heis. “The unusual thing about the euro compared to sovereign debt situations in the past is that it is the local currency of the state, but the state does not control it."
This means that the ECB is bound to help Greece with its problems.
Nout Wellink, one of the ECB’s governing directors, helped the euro sink to a historic low against the Swiss franc on Thursday after a Dutch newspaper quoted him as saying that the European bail-out fund should be doubled to 1.5 trillion euros ($2.15 trillion) if politicians want private sector investors to participate in a new Greek bailout.
What troubled countries and troubled companies do have in common is the growing importance of credit default swaps.
"With sovereign debt, like with some of the largest corporations, one of the biggest issues is how you deal with your CDS holders,” Heis said.
"With a corporate restructuring, you can do a debt-for-equity swap with the creditors. That's not meaningful when it comes to a country, although in some cases what has been done is that repayment has varied with GDP, which is a sort of equity equivalent."