Greek Debt Restructuring’s Retrospective Remorse

A special public-private sector group convened by the IIF to adapt emerging market sovereign debt workout principles to advanced countries highlighted glaring weaknesses in the initial Greek case in basic tenets such as data and information sharing, good-faith negotiations, and equal creditor treatment. European officials and banking executives were prominent on the committee, which also included US, Asian and Latin American representatives. The organization coordinated the investor side for six months of negotiations that concluded in this April’s exchange which featured a headline 75 percent haircut. It got initial 83.5 percent acceptance which rose another 15 percent with the application of domestic law collective action clauses. EUR 205 billion in bonds and loans were covered, and the deal was considered voluntary even as official parties providing their own assistance periodically threatened unilateral action. The IMF’s debt sustainability analysis attempting to reduce the medium term ratio to 120 percent of GDP was followed as economic indicators continuously shifted and deteriorated over the period. Numerous principle deviations resulted in an “inefficient and sub-optimal” process impeding commercial access normalization and financial stability, the panel believes. Bonds held by the ECB, national central banks, and the European Investment Bank were excluded, with such subordination of private claims implying adverse effects although the latest iterations of regional rescue mechanisms would end the practice. Contract sanctity was in turn placed in question by the retroactive insertion of CACs in instruments governed by local law which may cause their future shunning. The dialogue with mature country issuers has been “less extensive” than with developing economies, with formal investor relations programs often absent as recommended under decade-old guidelines. In the Euro area complexity was compounded by cross-border differences in accounting and regulatory standards, and the need for unanimous decision-making at the EU level.

On sustainability, private steering committee members criticized heavy emphasis on a nominal quantitative objective and limited consultation on policy and performance parameters that could have stressed cash-flow relief and maturity extension. The IMF’s independent judgment should be subject to input and views of interested outside parties to promote both analytical and monetary burden sharing. Information confidentiality should be respected by all sides, and the sovereign should be asked to contribute to the costs of ongoing advisory and statistical work. On a positive note the enhancements used, in particular GDP-linkage offering higher value for achieving growth thresholds, should be encouraged as a template. The ECB’s bond-buying expansion announced in September states it will be on pari passu terms, but this rendering appears to conflict with the ESM treaty assigning preferred status for European institutions just behind the IMF. The Spain bank recapitalization line arranged over the summer pledges comparable standing, but it has yet to be implemented and may itself be subordinated by a larger bailout subverting recent intent.