in the manner of a contractual collective action clause in a syndicated debt
instrument. Once the supermajority of creditors is persuaded to support an
amendment to the payment terms of the instrument, their decision
automatically binds any dissident minority.
Viewed another way, the Mopping-Up Law would merely
replicate at the level of the sovereign borrower the same protection enjoyed
by corporate borrowers in many countries, including Greece. For example,
we understand that in corporate reorganization proceedings under Greek
bankruptcy law, if a plan of reorganization is accepted by two thirds of the
affected creditors (including at least 40 percent of “privileged claims” such as
secured or senior claims), it will -- with court approval -- bind all creditors. A
Mopping-Up Law would achieve a similar result but at the level of a
sovereign borrower in need of a debt reorganization
Facilitating a sovereign debt restructuring through some form of
Mopping-Up Law would be consistent with the fundamental principle that a
sovereign debtor bears the burden of persuading its creditors that a debt
restructuring is essential, that the terms of the restructuring are proportional
to the debtor’s needs, and that the sovereign is implementing economic
policies designed to restore financial health. The only question is whether
the sovereign must persuade every last debtholder of these elements, or just
a specified supermajority of affected creditors. The trend in recent years, as
evidenced by the rapidity with which CACs have been introduced into New
York-law sovereign bonds, is in favor of the supermajority threshold.
Even the relatively mild step of facilitating a debt restructuring
through the passage of a Mopping-Up Law of some kind, however, could
draw a legal challenge. In the case of Greece, such a challenge could come
from three possible sources.
The firstis Article 17 of the Greek Constitution.
That Article declares that no one shall be deprived of property “except for
public benefit” and conditional upon payment of full compensation
corresponding to the value of the expropriated property. The question, it
seems to us (non-Greek lawyers that we are), is whether a mandatory
alteration of the payment terms of a local law Greek bond in the context of a
generalized debt restructuring could be said to impair the value of that bond;
an instrument that, in the absence of a successful restructuring, would have
in any event been highly impaired in value. Also of possible relevance may
be Article 106 of the Greek Constitution which gives the State broad powers
to “consolidate social peace and protect the general interest.”
A secondsource of possible legal concern might lie in the
European Convention on Human Rights and its Protocols. Article 1 of
Protocol No. 1 protects the right to the “peaceful enjoyment of possessions”.
This right may be restricted only in the public interest and only through
measures that do not impose an individual and excessive burden on the
private party. That said, Article 15 of the Convention permits measures,
otherwise inconsistent with the Convention, to deal with a “public emergency
threatening the life of the nation”.
foreign holders of local law-governed Greek bonds
subject to the Mopping-Up Law might look to Greece’s Bilateral Investment
Treaties for redress. BITs protect against expropriation without
compensation, as well as unfair and inequitable treatment. It appears that
Greece has signed more than 40 BITs with bilateral partners.
Assuming some version of a Mopping-Up Law could survive
any legal challenge, however, it could have significant tactical implications for
a Greek debt restructuring. More than 90% of Greek bonds are governed by
local law. If, to use our example, holders of 75% of all eligible bonds (local
law and foreign law) were to support a restructuring, our version of a
Mopping-Up Law should operate to ensure that more than 90% of the debt
stock will be covered by the restructuring. The Mopping-Up Law would not
affect holders of foreign law bonds. Participation by those holders would
need to be encouraged by moral suasion and the use of contractual
collective action clauses in the relevant bonds.
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.
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Working Paper Series