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Henes: The Eurozone Hold Out Problem

Jonathan Henes
Tuesday, 11 Oct 2011 | 11:14 AM ET

For today, it comes down to Slovakia.Slovakia may be the lone holdout of the eurozone member nations in connection with the expansion of the European Financial Stability Facility (the EFSF). That’s a problem for the eurozone. To expand the EFSF, all 17 members of the eurozone must vote in favor of it.

This gives an individual nation – such as Slovakia – an enormous amount of influence and demonstrates how difficult it is to achieve a political solution for an economic problem. (By the time this is published, Slovakia may have voted in favor of the EFSF expansion, yet the hold out problem will remain as the eurozone member nations will need to vote on additional policies in the future.)

In the corporate restructuring world, a lone holdout does not have significant influence. That is because there is a framework in place - in the form of the Bankruptcy Code - that addresses the hold out issue.

Specifically, the Bankruptcy Code allows a majority to bind a minority to a company’s plan of reorganization (the document that governs distributions to creditors and the company’s capital structure upon emergence from bankruptcy).

Specifically, a plan may be confirmed if more than 50 percent in number and two-thirds in amount of the creditors voting in a class support the plan. This takes away the power of a hold out (even multiple hold outs).

It also may help a company achieve an out of court restructuring in certain instances – even where a unanimous vote of creditors is needed - as hold outs know that in a bankruptcy their vote will not really matter.

But that’s corporate America, not the eurozone. Europe is in urgent need of a restructuring. The peripheral member nations (Greece, Portugal, Spain and Italy) are at risk of defaulting on their debt, Germany and France are experiencing an economic slowdown and European banks are not properly capitalized.

Europe needs to take bold actions and come up with a lot of money to stabilize its banks and restructure its sovereign debt. To stabilize and restructure the eurozone, its members need to speak with one voice. And here lies one of the problems. Today the threatened hold out is Slovakia. Who will it be tomorrow? Perhaps it will be Greece as the riots on the streets may influence politicians to say no to the austerity measures that are hurting the Greek economy.

The eurozone is engaged in a restructuring process. The rules and tools needed to accomplish it efficiently are non-existent. Rather, it needs to be accomplished politically. But, the member nations have competing interests.

They know a European banking crisis will serve a crushing blow to their economies, but, at the same time, the citizens of the member nations do not want to see their tax dollars going to support other countries or banks of other countries.

The inherent conflicts and complexities are difficult - at best - to navigate politically. And, the lack of a restructuring process makes it almost impossible. As a result, the uncertainty of the restructuring will continue and there is a chance that the restructuring will not end well.

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Jon Henes is a partner in the restructuring group at Kirkland & Ellis LLP where he has led some of the most complex restructurings in a variety of industries, including media, chemicals, energy, manufacturing, real estate, retail and telecommunications. Jon has also frequently appeared on CNBC's "Worldwide Exchange" as a guest expert on various financial and economic topics and is a member of the Economic Club of New York.

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