Banks Push Greek Bailout Plan
No bank likes to take a loss, especially those in Europe that already suffer from a toxic mix of thin capital, troubled financing and weak loan books.
But in the case of the proposed second bailout for Greece — the one that is supposed to make private investors feel the financial pain along with taxpayers — the biggest banks in Europe are on the road now promoting the plan.
It’s not that the banks are suddenly masochists. It’s that this first major bond restructuring in Europe’s long-festering debt crisis is shaping up as a much better deal for the banks than for the Greeks it is supposed to be helping.
Holders of the Greek bonds would get much better value than they could in the open market, while Greece would still owe a lot of money. What’s more, Greece would be surrendering a lot of its negotiating clout if, in the future, it needed to go back to the bailout bargaining table.
This week, bankers representing the Greek government — Deutsche Bank , BNP Paribas and HSBC — have been explaining to investors why it is in their interest to trade in their decimated Greek bonds, take a 21 percent loss and accept a new package of longer-dated securities with AAA backing. Those bondholders include big European banks, smaller fund managers and insurance companies.
The bond exchange is a crucial component of the more than 200 billion euro ($286 billion) in rescue packages that Europe and the International Monetary Fund have put together to support the near-bankrupt Greek economy through 2014. The German chancellor, Angela Merkel, and others insisted that banks make such a contribution to give them some political cover at home.
The part of the rescue announced in July is subject to the approval of Germany and the governments of the 16 other member nations of the euro union in coming weeks. If investors balk at the 21 percent write-down that is the price for getting a deal done, the whole package could collapse. European governments would be hard-pressed to come up with those extra funds themselves.
But with the price of Greek debt trading in some cases at 50 cents on the dollar — even lower than when the bailout deal was announced in July — the 21 percent haircut seems to be quite a bargain.
As a bonus, the new bonds would be governed by international law, rather than Greek law. That is a significant alteration of lending terms that would strengthen the negotiating hand of the bondholders if Greece eventually concluded it had no alternative but to default — even after this latest bailout.
The International Institute for Finance, the advocacy group for global banks that is also the chief architect of the deal, says that 60 to 70 percent of the financial institutions holding Greek bonds have agreed to the swap so far. That comes close to the 90 percent threshold that the Greek government has stipulated, although it is too early to predict the final outcome because Greece will not formally make the swap offer until October.
“This is an attractive offer,” said Hung Tran, a senior executive at the institute. “We are making the case that if this deal is implemented it will restore stability to Greece.”
The question remains, however, whether the banks that financed the country’s debt by buying its bonds would get off too easy — and whether the Greek government should have pushed for a larger write-down to ease its debt load.
Analysts also note Greece’s diminished bargaining power in any future debt negotiations with its bankers.
In past debt negotiations involving countries like Argentina, Uruguay and Russia, the bulk of the debt was governed by either United States or British law. That gave the biggest bondholders the upper hand in negotiating terms; they could either hold out for a better deal or challenge the governments in foreign courts.
In the case of Greece’s debt, more than 90 percent of it was issued and is governed under Greek law, as a holdover of the era preceding Greece’s entry into the European monetary union in 2001. That, legal experts say, currently gives the Athens government the flexibility, if it so chooses, to alter bond contracts and secure a more beneficial restructuring deal over the objections of its foreign creditors.
For example, the Greek Parliament could pass a law allowing it to push through a restructuring deal with the support of a simple 51 percent majority of creditors — as opposed to the 75 percent level that most international contracts require. More drastically, it could simply refuse to pay and leave it to creditors to seek redress in Greek courts.
Debt experts have long argued that this legal quirk gave a powerful bargaining advantage to Greece as it sought to pare down its debt.
“No other debtor country in modern history has been in a position significantly to affect outcome of a sovereign debt restructuring by changing some feature of the law by which the vast majority of the instruments are governed,” wrote Lee C. Buchheit, a veteran debt lawyer at Cleary Gottlieb Steen & Hamilton, in a paper he co-wrote in 2010 about how Greece might restructure its debt.
If the exchange goes through, though, the old bonds will be replaced by ones governed by international law. That would tilt the negotiating scales in favor of Greece’s international creditors.
Mr. Buchheit is now advising the Greek government on its debt exchange offer. Neither he or the Greek government would comment on whether Greece would give up too much by losing the local law advantage.
There is no doubt that as long as it wants to remain a member of a common currency zone, Greece, unlike Argentina or Russia before it, has limited ability to act in a more proactive manner or threaten to default outright. But there is no question Greece has lost a big bargaining chip.
“This was a big concession, but because Greece was not willing to default it had little choice,” said Anna Gelpern, an expert in sovereign debt law at American University in Washington. “But if in another two years their debt stock is still unsustainable and they are willing to walk away from their debt and Europe, then they will be exposed to a higher threat of litigation.”
With this latest injection of money, the bet is that Greece will not reach that point of no return.
But late Wednesday, a Greek parliamentary committee issued a report saying that Greece’s debt dynamics were “out of control.” Given the depth of the recession — the economy is expected to shrink by more than 5 percent this year — Greece’s ratio of debt to gross domestic product for 2012 is likely to exceed the official forecast of 172 percent, the report said.
The government disputed the committee’s findings, prompting the panel’s head researcher to resign on Thursday. But what cannot be disputed is that this year and next, Greece’s debt-to-G.D.P.-ratio will go up — not down.