The political element of the Greek debt crisis might be
riddled with ambiguity, but the legal tools at
Europe’s disposal are relatively clear.
Here are the legal mechanisms available.
Bilateral law change
Some restructuring lawyers believe a bilateral law change
could force haircuts onto recalcitrant creditors overnight.
According to one lawyer, who declined to be named, around
90% of Greece’s sovereign bonds are governed by
Greek law, and the majority of the remaining 10% governed by
The two countries could change their respective laws very
swiftly to restructure the outstanding debt, as long as it
doesn’t violate any bilateral treaties.
"This happens in restructurings all the time.
There’s not a western country which
hasn’t changed its bank resolution laws," said the
This would leave only the bonds denominated under Swiss law,
the lawyer said, but they are a fraction of the original
Of course while this is legally feasible, it must be
practical if it is to work.
A European banker said that any deal has to be sustainable
for the European banks, given they hold the bulk of the Greek
"Until the banks are solid enough to absorb the shocks, you
couldn’t do it," they said.
Another tool available is the exit consent. This allows a
50% majority of bondholders to change the non-financial terms
of the bond to effectively make them worthless for the minority
holdouts, forcing them to swap into re-profiled Greek bonds on
better terms for the sovereign.
According to one restructuring lawyer, a country could carve
out the old bonds’ interest payments from the
sovereign immunity waiver, delist the old bonds and remove
cross-default and cross-acceleration provisions to ensure the
old bonds are tendered.
"When you introduce the clout of sovereign immunity, it
makes it difficult for bondholders to litigate," said the
Uruguay and Ecuador have used exit consents to re-profile
their bonds. According to one lawyer, 97% of the Ecuador
bondholders voted to take up the new bonds.
"If there is a core at 50% then you’re really
jamming the majority to come into line," the lawyer added.
Collective action clauses
The European Stability Mechanism (ESM), announced in
November 2010, is designed to act in many ways as a European
version of the International Monetary Fund.
The ESM will have the power to lend to struggling countries
based on a stringent programme of economic and fiscal
adjustment, and on a rigorous debt sustainability analysis. If
the country is insolvent, it can negotiate a restructuring plan
To help achieve this plan, all sovereign bonds will contain
collective action clauses (CACs), which allow all debt
securities issued by a country to be considered together in
In a restructuring scenario, a qualified majority of
bondholders could vote to change the terms of payment
– for example forcing a standstill, extension of
maturity, an interest rate cut or a haircut, thereby forcing
the minority holdouts to the same agreement.
The problem is that sovereign CACs and private sector
involvement in the ESM will only be attached to bonds issued
from in mid-2013, which isn’t much use for the
crisis confronting Europe right now.
International sovereign debt restructuring
An international Sovereign Debt Restructuring Mechanism
(SDRM) has been under discussion for years.
While countries signed up to the United Nations Commission
on International Trade Law (Uncitral) can recognise
restructurings occurring in other countries, there is still no
equivalent for sovereign insolvencies.
While there is no practical template as yet, restructuring
lawyers suggest other alternatives which, like Uncitral,
don’t necessarily require recognition by every
country but can still be effective.
For example, it would be easy for a treaty organisation to
recognise the Permanent Court of Arbitration in The Hague and
have it supervise restructurings, according to one lawyer.