By Apostolis Fotiadis

While reading and discussing with various people the prospects of a second debt relief for Greece, I recalled an exchange of emails I had with Lee Buchheit, a partner in the New York based Cleary Gottlieb Steen & Hamilton LLP and a world expert on sovereign debt, on the particularities of the first debt relief that took place in 2012.

The so called PSI is still a hotly debated issue in Greece and its character could very much affect how a second effort might take place.

Given that Buchheit has a direct understanding of what happened then as he was an advisor of the Greek side in the negotiations, his insights are always important.

So I decided to contact him again and ask him for some more comments on details I am trying to understand. I will use the material for some reporting in Greek but here is his emailed response in English.

What have been the mistakes of the first debt relief?

If there was a mistake in the handling of the Greek debt situation in the spring of 2010, it was in delaying the PSI operation for nearly a full two years after Greece lost market access. A debt restructuring at the outset of the crisis (when EUR 300+ billion of GGBs were in the hands of private creditors) would have had two consequences.

First, the debt relief would have been spread over a much larger number of bondholders, meaning that the contribution required from any one of them would have been less. As it was, by the time PSI was launched in March of 2012, only EUR 206 billion of GGBs were left in the hands of private creditors, requiring a net present value writeoff of about 79 percent in the PSI operation.

Second, a significant part of the original official sector loans to Greece went to repay maturing bonds in full and on time. Had those bonds been restructured at the outset of the process, either the size of the bailout packages could have been significantly reduced or, even better, those additional funds could have been employed to support pro-growth initiatives.

Why was the debt restructuring delayed?

In my view there were three reasons.

1. The official sector feared contagion to other Eurozone peripheral countries. (As it turned out, of course, the contagion happened anyway.)

2. Much of this debt was owed to commercial banks in northern Europe. Some of those banks are thinly capitalized. So lending Greece the money to pay northern European banks in full avoided a potentially awkward situation, perhaps even the need to recapitalize some of those banks.

3. Some in Euro-officialdom fervently believed that sovereign debt restructurings were a unique affliction of emerging market countries and could never happen — should never happen — in developed countries, particularly ones in the European monetary union. It is not easy to explain this sentiment. It sprang from some combination of philosophy, theology and patriotism.

If the delay of the first debt relief has deteriorated its consequences, it is again the case for what many experts consider an imminent second debt relief, that its delay will make it more painful and disastrous than it could have been. Always at the expense of European citizens and for protecting the interests of the financial establishment.