Why Greek bondholder law is “too awful to think about"

Author: Gemma Varriale | Published: 20 Jan 2012
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With talks between Greece and its private creditors still unresolved and a Greek default likely, private practice and in-house are equally concerned about the prospect of a law that would force bondholders into a debt exchange.

According to one in-house at an international bank, the real issue behind the forced legislation is the fact that Athens is now in a position to bring it in.

  “They couldn’t do the law if it was an English law contract,” he said. “Having somewhere like Greece, which is a peripheral country, issue that level of debt domestically was a big mistake for the market. I think people appreciate that now.”

When Argentina was restructured, 90% of the nation’s debt was under English, US or German law.

“This is a whole new ball game,” added the in-house.” I think the whole eurocrisis has made people focus a lot more on governing law.”

90% of the Greek debt is issued under domestic law. This is the reason that bondholders are now susceptible to the Greek courts and local Greek legislation.

Greece and its advisers, Lazards and Cleary Gottlieb, are considering introducing legislation to insert collective action clauses into the nation’s debt documents. These clauses would be applied on a retroactive basis to alter the terms of existing debt.

For the creditors now holding out, the insertion of a collective action clause means they would be dragged along with the other creditors in accepting the restructuring deal and receiving less money than they were originally owed.

"Greece is threatening to change the rules while the game is being played,” said Jonathan Henes of Kirkland & Ellis in New York. “That doesn’t create a great deal of stability in the markets.”

The in-house didn’t want to countenance the possibility of a retrograde collective action clause. “It’s too awful to think about,” he said.

Henes believes Athens’ decision to pursue a forced bond swap could set a dangerous precedent for other eurozone countries.

As Europe continues its economic decline, we may start seeing other countries unable to pay off or rollover their debts and other restructurings may start,” he said. “I think what we’re watching is a microcosm of what may happen on a macro level.”

Henes predicts a shift in investor behaviour if Greece retroactively included collective action clauses. “You’ll see investors start to factor this into their calculations: they’re all going to assume that these collective action clauses are in the agreements whether they really are or not,” he said.

Most lawyers IFLR spoke to agree that even if the hedge funds, a significant creditor group, try to take Greece to the European Court of Human Rights to challenge this law, it is difficult to sue a sovereign. “Remedies against Greece would be difficult even assuming, however unlikely, that a disgruntled investor could win,” said Henes.

If a deal emerges to reduce the average coupon on a benchmark 30-year bond, there will be no need for this law. If it doesn’t, the stage is set for a showdown between bondholders and Greece’s government.    

Read more: eurozone redenomination   Eircom   exchange controls  EU veto