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An Architect of a Deal Sees Greece as a Model

Now that Greece is close to completing the largest bond write-off on record, should other debt-plagued nations in Europe follow its lead?

European Bank Note
Sabine Scheckel | Image Bank | Getty Images
European Bank Note

That thought is anathema to most policy makers in Europe, where the main stock indexes were down more than 3 percent for the day on Greek jitters and gloomy new data on the global economy.

European officials hold the view that Greece’s debt problems are unique and that there is no need for countries like Portugal, Ireland, Spain and Italy to push creditors to accept losses on their holdings.

But the intellectual fathers of Greece’s intricate bond swap beg to differ.

Mitu Gulati, a charismatic law professor at Duke, and Lee C. Buchheit, the philosopher king of sovereign debt lawyers and a lead adviser to Greece on the deal, see themselves as sovereign debt taboo-busters. And they are not shy about pressing their views, as Mr. Gulati did with characteristic wit at a sovereign debt conference here last week.

Instead of presenting an arcane paper on debt guarantees, Mr. Gulati titillated his audience by calling for other heavily indebted countries in Europe to carry out their own Greek-style swaps, albeit with smaller haircuts for creditors because the other nations are not as deeply indebted as Athens is.

“Lee probably could not say this, but I can because I don’t have clients,” Mr. Gulati said with a chuckle, as he offered his apologies that Mr. Buchheit could not attend. “Although I wish these were the views of Lee’s clients.”

During his 35-plus years at Cleary Gottlieb Steen & Hamilton, in New York, Mr. Buchheit has secured groundbreaking debt restructuring deals in numerous countries in Latin America, and more recently in Iraq and Iceland.

Mr. Gulati’s argument was fairly straightforward. Instead of repeated bailouts and a lost decade of austerity in Southern Europe, countries should at least soften the blow by cutting a deal directly with their creditors to reduce their debt loads.

Indeed, he argued, no time is better than now, with investors fearing that some other country — Portugal, in the eyes of many — will copy Greece’s move to unilaterally impose so-called collective action clauses that require even reluctant bondholders to go along with the majority on a deal.

Portugal’s finance minister has said in interviews that his country plans to fully honor its debts. But investors’ skepticism is presumably a reason that the yields on Portugal’s long-term bonds have risen by two percentage points in the last two weeks.

No one suggests that the steps Mr. Gulati is recommending would come easily. And he joked that his friends at the European Central Bank have urged him not to spread this idea too widely.

“I asked them, ‘Why not?’ ” Mr. Gulati recounted. “And they said, ‘Because then everyone will do it.’ ”

By any measure, Mr. Gulati and his longtime mentor, Mr. Buchheit, have become the most potent double act now playing on the sovereign debt circuit. It was their joint paper in May 2010 that first proposed a way for Greece to force investors who reject a deal to suffer the same loss as those who agreed.

Greece, which hired Mr. Buchheit and his team of lawyers last July, has followed this strategy to the letter. On Thursday night Greece will disclose what percentage of investors have agreed to the deal. It is widely expected that the collective action clause will be invoked to reach the official target of 95 percent participation.

“Lee has seen this movie many times before,” said Petros Christodoulou, the director general of Greece’s debt management agency. “He is always five steps ahead of the game.”

Who are these guys, and where did they come from?

On the face of it, the two debt exorcists are a bit of an odd couple. Mr. Gulati, 44, is a bond contract specialist who enjoys digging into the ins and outs of negative pledges, pari passu and other boilerplate arcana. He skillfully cloaks his power résumé — Harvard Law and a clerkship with Samuel A. Alito Jr. before he became a Supreme Court justice — with a slightly slouchy demeanor. He delivered his address last week while wearing chinos and a casual pullover.

Mr. Buchheit, a graduate of Middlebury College in Vermont, with law degrees from the University of Pennsylvania and Cambridge, is 61 and has more of an old-world mien with his dapper mustache, nicely cut suits and gentlemanly manner.

Mr. Buchheit is recovering from an illness and could not be interviewed for this article.

“Everyone in this field is a D.O.B.” — disciple of Buchheit — “whether they like it or not,” said Adam Lerrick, a sovereign debt expert at the American Enterprise Institute. “Lee has spent his career trying to create a system where debtor countries and their creditors can restructure government debt without intervention by the official sector.”

The tools of Mr. Buchheit’s trade — collective action clauses, exit consents and trust indentures — may be complex, but they serve a basic aim: giving a debtor country the necessary leverage to compel all of its unhappy creditors to accept losses on their holdings when necessary and thus achieve meaningful debt relief.

Which doesn’t earn Mr. Buchheit popularity among bondholders. Many of them see him as an evil genius, confecting legal tricks that make it easier for indebted countries to shirk their financial obligations — and in the process saddle investors with losses.

So what does it feel like to be on the other side of the table with a Buchheit client?

“Brutal,” said Hans Humes of Greylock Capital, who agreed this week, along with representatives of 11 other financial institutions, to accept an effective 75 percent loss on the value of his Greek bonds. “Creditors have less recourse when he is involved — but that is his job.”

Mr. Buchheit’s most recent move was to figure out how to take advantage of the fact that Greece’s bonds were governed by local law, as a way to drive a hard line with creditors.

Mr. Gulati, who worked for Mr. Buchheit in 1994 as a junior lawyer before moving to academia, says that the notion was first raised by one of his students. The student noticed that under local law the contracts of Greek bonds did not contain collective action clauses and other provisions that one usually finds in foreign law bond contracts to explain what will happen if a debtor cannot fully pay an obligation.

Mr. Gulati and Mr. Buchheit were perplexed. How could Greece restructure its debt without the necessary tools?

Then the answer hit them. Far from being a disadvantage, the fact that Greek bond contracts were in effect amendment-free meant that smart lawyers like Mr. Buchheit could custom-design a collective action clause in Greece’s favor.

In their May 2010 paper the two men argued that Greece was actually in a better position than any country in modern history to achieve meaningful debt reduction. The paper was little noticed at the time, especially because European leaders were then refusing to accept even the possibility of a debt restructuring.

But a clever campaign of media outreach and global conference-hopping by the two soon brought the idea to a wider audience. Eventually the Greek Finance Ministry came calling.

In many ways, Mr. Buchheit’s prodigious publishing output makes him more of a deal professor than a deal maker.

Sean Hagan, the top lawyer for the International Monetary Fund, says that the Greek debt deal is just the latest example of Buchheit blue sky thinking’s becoming policy. “Lee has shaped the law in this area,” he said.

Still, as the latest act in the Greek debt drama approaches its climax there is no sign yet that other countries are ready to adopt the Buchheit-Gulati model. At the conference in Madrid, a senior official from Spain’s central bank took immediate issue with Mr. Gulati’s debt swap proposal, calling it “very risky” and wrongheaded in every way.

In Portugal, where Mr. Gulati is teaching a class this week and many see a debt restructuring as inevitable, officials continue to insist that the country’s debt burden is manageable. Investors, however, appear unconvinced. The country’s 10-year bond yield has almost doubled to 13.5 percent since Portugal’s 78 billion-euro bailout, then worth $116 billion, last spring.

With markets already pricing in a debt restructuring of some sort in Portugal, a voluntary haircut would probably not spur a broader rout. For larger countries like Spain and especially Italy, however, the contagion risk would be greater from an attempt to renegotiate the terms of debt.

Nonetheless, Mr. Gulati argues, the longer that deeply indebted countries postpone the inevitable, the more expensive the ultimate bill to taxpayers will be.

“Let’s show everyone that we have learned something from Greece’s suffering,” he said. “But our time to do this is limited.”

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