The biggest secret of the greek crisis
This no detail. Greece about to give up bonds governed under Greek law for bonds governed under British law. Help of “unity” government urgently needed.
ATHENS nov 7th (TPP) The political climate in Greece is explosive, but instead of the democratic solution of a snap election, a “unity” government is now about to be formed, with an ex ECB banker, most probably, at the helm*. The explicit goal of this government, avidly supported by the EU/ECB/IMF troika, is to implement the agreement reached on October 26th in Brussels. Why is this so important?
There is at least one component of the Brussels agreement that hasn’t gotten the publicity it deserves. Greek debt is for the most part governed under Greek law, meaning that the Greek parliament could decide, theoretically, to convert the debt into a new Greek currency and print as many drachmas as necessary to pay it off. If the bond swap agreed in Brussels goes ahead, then investors will be able to put such fears to rest once and for all, since they will receive new bonds governed under English law.
On Thursday, Dow Jones Newswires talked to some unnamed official source, presumably in Germany, confirming that this indeed is the case.
BERLIN (Dow Jones Newswires)--Private investors should be encouraged to swap their old Greek bonds for new ones as part of a Greek debt restructure, because British securities law will apply instead of Greek law in future, an official familiar with the situation said.
The official said that under existing Greek law investors had fewer protections. Should investors refuse to swap their bonds as part of the European restructuring deal agreed in Brussels, they run the risk of losing everything through a Greek default.
The official also said total outstanding Greek debt was about EUR360 billion, of which about EUR200 billion was held by the private sector.
The official said E.U. leaders made no decision about drawing forward the launch of the European Stability Mechanism to mid-2012, adding that euro-zone countries would make every effort to introduce legislation to launch the ESM, the planned permanent euro-zone bailout fund, as soon as possible.
-By William Boston, Dow Jones Newswires, +49 30 2888 4128, [email protected]
FT Alphaville is still picking through the terms of the options, but there are a couple of details that we find very interesting. In short, whatever option is chosen, the new swapped bonds will be governed under English law, and will also insert both a negative pledge clause and a collective action clause. FT august 26, 2011
“This is probably the biggest secret of the greek crisis” wrote Panos Panagiotou, analyst at xrimanews.gr “If indeed Greek debt ends up being governed under English law, then Greece will need to pay its debts in euros, despite the presumed collapse of the euro/drachma exchange rate. This means Greece will be irrevocably surrendered to its creditors, who will be legally entitled to either get their money back through even steeper taxation, or through confiscation of public assets, or both.”Suppose, writes Panayiotou, that the October 27th deal goes the way of previous agreements, it fails to stem the crisis and Greece ends up defaulting on its debt. ‘Why has the country surrendered this legal advantage that could prove crucial for the country’s survival?’’
By far, however, the greatest advantage that Greece would
enjoy in a restructuring of its debt derives from the fact that
so much of the debt stock is expressly governed by Greek
law (90% or more, if our figures are correct). This raises the
possibility, discussed in more detail below, that the
restructuring could be facilitated in some way by a change
to 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. (Buchheit & Gullati, Greece- The endgame scenarios)
debt restructuring by changing some feature of the law by
which the vast majority of the instruments are governed. (Buchheit & Gullati, Greece- The endgame scenarios)
The experts cautioned that
“No country in Greece’s position would lightly consider a change of local law as an easy method of dealing with a sovereign debt crisis.
The following factors, among others, counsel extreme caution before embarking on such a remedy.
1 If done once, future investors will fear that it could be
done again. The debtor country may therefore be
compelled in future borrowings (in which international
investor participation is sought) to specify a foreign law
as the governing law of its debt instruments.
2 A dramatic change in local law by one country might
allow a worm of doubt to slip into the heads of capital
market investors in other similarly-situated countries,
driving up borrowing costs around the board.
3 The official sector supporters of the debtor country will
presumably balk at any action of this kind that could
unleash the forces of contagion and instability upon
other countries whose debt stocks also contain
predominantly local law-governed instruments.
4 The more dramatic or confiscatory the effect of the
change of law, the higher the likelihood that it would be
subject to a successful legal challenge.
So Greece should immediately give up this huge advantage and swap the existing debt for debt issued under English law just in order to avoid having to do this later? Should the country forego the option of changing the terms of the debt to its favour, just because it may need to do this in future borrowings? How convincing would this argument be to a Greek government that really minds the interests of its citizens?
Objections 2&3 are making it much clearer why the E.U. demands the immediate formation of a Greek government that is 100% determined to implement the haircut/bond swap agreement: If Greece defaults and takes advantage of the local law clause, other countries in similar situations might be tempted to do the same. "The forces of contagion might be unleashed" upon an otherwise completely healthy eurozone system...
*UPDATE nov 11 Ex ECB vice president Loukas Papademos was sworn in as prime minister, heading a "unity" government of socialists, conservatives and far right on Friday, nov 11th