How to Restructure Greek Debt

Plan A for addressing the Greek debt crisis has taken the form of a €110 billion financial support package for Greece announced by the European Union and the International Monetary Fund on May 2, 2010. A significant part of that €110 billion, if and when it is disbursed, will be used to repay maturing Greek debt obligations, in full and on time. The success of Plan A is not inevitable; among other things, it will require the Greeks to accept - and to stick to - a harsh fiscal adjustment program for several years. If Plan A does not prosper, what are the alternatives? And how quickly could a Plan B be mobilized and executed? This paper outlines the elements of one possible Plan B, a restructuring of Greece’s roughly €300 billion of government debt. Prior sovereign debt restructurings provide considerable guidance for how such a restructuring might be shaped. But several key features of the Greek debt stock could make this operation significantly different from any previous sovereign debt workouts. To be sure, a restructuring of Greek debt will not relieve the country from the painful prospect of significant fiscal adjustment, nor will it displace the need for financial support from the official sector. But it may change how some of those funds are spent (for example, backstopping the domestic banking system as opposed to paying off maturing debt in full). This paper does not speculate about whether a restructuring of Greek debt will in fact become necessary or politically feasible. It focuses only on the how, not the whether or the when, of such a debt restructuring

Greek Debt: The Endgame Scenarios

Perhaps Greece -- a country with a debt to GDP already approaching 150 percent and set to move even higher -- avoids a debt restructuring. Perhaps not. What are the possible scenarios if Greece cannot return to the capital markets to refinance this gargantuan debt stock once its EU/IMF bailout package expires in two years time? What would a Greek debt restructuring look like after mid-2013? And (sharp intake of breath here) what would happen if such a debt restructuring were undertaken before that point

Targeted Subordination of Official Sector Debt

If Greece’s debt is unsustainable, and most observers (including the IMF) seem to think it is, the country’s only source of funding will continue to be official sector bailout loans. Languishing for a decade or more as a ward of the official sector is undesirable from all perspectives. The Greeks bridle under what they see as foreign imposed austerity; the taxpayers who fund the official sector loans to Greece balk at the prospect of shoveling good money after bad. The question then is how to facilitate Greece’s ability to tap the private capital markets at tolerable interest rates. The IMF’s answer? Write off a significant portion of the official European loans to Greece or, at the very least, stretch out the grace and repayment periods of those loans until the Crack of Doom. There may be an alternative -- persuading the official sector voluntarily to subordinate its credits, on a targeted basis, to new borrowings by Greece from the private markets. If the alternatives for the official sector are to lend the money itself (with the risk that the funds may never be recovered), or to write off their existing Greek loans now as a means of rendering the country presentable to the markets, subordination may be a more politically palatable option

Custom in Our Courts: Reconciling Theory with Reality in the Debate about Erie Railroad and Customary International Law

One of the most heated debates of the last two decades in U.S. legal academia focuses on customary international law’s domestic status after Erie Railroad v. Tompkins. At one end, champions of the “modern position” support customary international law’s (“CIL”) wholesale incorporation into post-Erie federal common law. At the other end, “revisionists” argue that federal courts cannot apply CIL as federal law absent federal legislative authorization. Scholars on both sides of the Erie debate also make claims about the sources judges reference when discerning CIL. They then use these claims to support their arguments regarding CIL’s domestic status. Interestingly, neither side of the debate has conducted an empirical analysis of what U.S. federal courts have actually done. This Article undertakes such an analysis and suggests that U.S. federal courts have, for the most part, behaved in a manner unanticipated by revisionists and modernists alike—the courts have followed themselves. After tracking the sources considered as evidence of CIL and cited in both pre-Erie and post-Erie case law, it turns out that, at all times before and after Erie in 1938, U.S. federal judges have relied primarily on domestic case law when making CIL determinations. Put starkly, the great Erie debate about CIL determinations in U.S. federal courts—and the authority the judiciary ought to attach to certain international sources—may have been occurring somewhat orthogonally to the fact that U.S. courts do not seem to pay much attention to these sources in practice

Walking Back From Cyprus

Last Friday, the European leaders trespassed on consecrated ground by putting insured depositors in Cypriot banks in harm’s way. They had other options, none of them pleasant but some less ominous than the one they settled on

Drafting a Model Collective Action Clause for Eurozone Sovereign Bonds

In the wake of the Eurozone sovereign debt crisis, the European financial authorities announced last November that all Eurozone sovereign bonds issued after mid-2013 must contain an identical collective action clause (CAC) in order, if necessary, to facilitate a restructuring of thoseinstruments. CACs in sovereign bonds have been the subject of considerable attention over the last ten years. They were introduced into sovereign bonds governed by U.S. law only in early 2003. Yet a surprising number of versions of the clause can be found in modern sovereign bonds. The history of the research and development of this contractual provision is, or at least ought to be, relevant to the drafting of the model Europeanversion of the clause

The Eurozone Debt Crisis: The Options Now

The Eurozone debt crisis is entering its third year. The original objective of the official sector’s response to the crisis -- containment -- has failed. All of the countries of peripheral Europe are now in play; three of them (Greece, Ireland and Portugal) operate under full official sector bailout programs. The prospect of the crisis engulfing the larger peripheral countries, Spain and Italy, has sparked a new round of official sector containment measures. These will involve active intervention by official sector players such as the European Central Bank in order to preserve market access for the affected countries. This article surveys the options now facing the sovereign debtors and their official sector sponsors. It concludes that there are no painless or riskless options. In the end, the question may come down to this -- to what extent will the official sector sponsors of peripheral Europe be prepared to take on their own shoulders (and off of the shoulders of private sector lenders) a significant portion of the debt stocks of these countries during this period of fiscal adjustment

Walking Back From Cyprus

Last Friday, the European leaders trespassed on consecrated ground by putting insured depositors in Cypriot banks in harm’s way. They had other options, none of them pleasant but some less ominous than the one they settled on

Talking One\u27s Way Out of a Debt Crisis

The policy of Euro-area officialdom in the period 2010-2011 was to avoid, at all costs, a default and restructuring of the sovereign debt of a member of the monetary union. This policy was motivated principally, but not exclusively, by a fear that the international capital markets, if forcibly reminded of the precarious position of overindebted, growth-challenged members of a monetary union, might recoil generally from lending to European sovereigns. In short, they feared contagion. The only alternative to permitting a debt restructuring, of course, was an official sector bailout. The afflicted countries -- Greece (until 2012), Portugal, Ireland and Cyprus -- received loans from official sector sources sufficient to allow them to repay in full their maturing bond indebtedness. Whenever and wherever the crisis erupted, contagion was thus held in check by the blunt technique of smothering the outbreak -- in money. The proponents of this policy argued at the time, and argue now, that many European sovereigns in 2010 were far too fragile to endure a bout of market contagion. They argued that an acute crisis needed to be averted in order to buy time for the implementation of a gradual but more durable remedy. Had the intervening eight years been used to reduce the debt vulnerabilities of the peripheral (and even some core) states, this argument would now be powerful, indeed invincible. Unfortunately, the opposite happened. Average state indebtedness in Europe today is about one-third larger than it was in 2008. Both the member states and the market saw the reprieve as spreading a reliable official sector safety net under their exposure. So they kept on borrowing and lending. Only the zero interest rate policies of the world’s major central banks during this period have kept debt servicing costs at tolerable levels