Mitu Gulati is a professor at Duke and an expert on debt contracts, the evolution of contract language, and the history of international financial law. He works closely with Lee Buchheit of Cleary Gottlieb Steen & Hamilton to develop what ultimately became Greece's restructuring plan. This was through a paper that he and Lee co-wrote earlier in 2010.

Greece: An Effective Model for Europe’s Next Wave of Debt Restructuring?
Atlantic Council
March 27, 2012
11:00AM ET
Operator: Excuse me, everyone. We now have Ms. Anna Gelpern, professor of law at American and Georgetown University, Mr. Mitu Gulati, professor of law at Duke University, and Mr. Alexei Monsarrat, director of global business and economics at the Atlantic Council on the line. Please be aware that each of your lines is now in a "listen only" mode. At the conclusion of our guest's remarks, we will open the floor for your questions. At that time, instructions will be given as to how to proceed if you would like to ask a question. I would like to turn the conference over to Mr. Monsarrat who will be offering some introductory remarks and introducing Professors Gelpern and Gulati. Mr. Monsarrat, please begin.
Alexei Monsarrat: Okay. Thanks very much, Operator, and good morning, everyone, and welcome to the call. Thanks for joining us and today, we're going to be having a discussion on Greece's recently concluded debt agreement and what that might meant for the rest of Europe. As many of you no doubt have seen there's quite a bit of noise starting to percolate about what this might mean for Portugal or Spain and whether contagion for Greece really has been stopped or if we're now going to see more of these kinds of restructuring deals. So, we have brought on to the line two experts on this issue to help enlighten us. Anna Gelpern is a visiting professor of law at Georgetown and a professor of law at American University. She's contributed to international initiatives on financial reform and sovereign borrowing, most recently as part of the Second Warwick Commission and as an expert for the United Nations Conference on Trading Development. Anna is also a fellow at the Peterson Institute and at the George Washington University School of Law, so she has a number of hats that she wears and has served previously at the Treasury Department covering all of these issues on international debt and finance. Mitu Gulati is a professor at Duke and an expert on debt contracts, the evolution of contract language, and the history of international financial law. He works closely with Lee Buchheit of Cleary Gottlieb Steen & Hamilton to develop what ultimately became Greece's restructuring plan. This was through a paper that he and Lee co-wrote earlier in 2010. And so, we're really looking forward to hearing from both of you, Anna, Mitu, and I would turn it over pretty much immediately to you and, Mitu, I believe you're going to lead us off.
Mitu Gulati: Thank you. Thank you, Alexei. Thank you to all of your colleagues who made this possible. So, I'll start and I'll try to be really quick; although, I am very fond of the sound of my own voice. But a couple of disclaimers: I'm going to draw extensively from the work of my co-authors, Jermaine Settlemeyer, Frank Schmanz, Lee Buchheit, and Anna herself. And I won't give them credit, largely because most of them work with institutions that would not want to be associated with anything that I say. And the second disclaimer is that I'm primarily a lawyer and I study bond contracts. That said, I'm happy to talk about all sorts of topics that nobody responsible should pay attention to, like economics and politics. So -
Alexei Monsarrat: (overlapping) And, Mitu, that's a good point to just briefly interrupt you, and I should have said at the outset that this call is on the record. So, anything that you say that no one will want to associate with can be printed.
Mitu Gulati: Wonderful! So, let me start with the position that many of my friends in the official sector take, which is that Greece is unique and there's really nothing to be learned from there. That we should put it to the side and everything is good now. So, I had titled my talk, "Greek Lessons," and that's the farthest thing from my mind, that Greece is unique. So, lesson one is really whether we learned anything from the delay. So, let's go back to April, 2010. And in April, 2010, what did we have? Well, we had the precise legal strategy that was used eventually in March, 2012, but we also had a very large Greek debt stock that was almost all in the form of bonds and almost all held by institutional investors, meaning a restructuring could have been done, especially given what we know now about what happened in late February and early March, 2012, could have been done very easily at that point. How much would it have taken to get us a sustained debt relief? About a 30 percent cut from the private creditors at that point. The question then is, whether the cut to the private creditors took now, and the position Greece is in now, is a better or worse one than we would have been in two years ago if we had done the same thing there. Now, I think it's fairly clear that two years ago, if we had done what we did today and we didn't learn anything in the intervening two years, at least in terms of legal strategy that helped us do the deal any better this time around. Now, maybe there are other things that people will say happened that helped us do it better, but as I calculate, the positions of pretty much everybody in the game, the official sector, the creditors, and most important, the Greek government and the Greek people themselves, all of them were worse off as a result of waiting for two years. Now, enough crying over the Greek situation. The question is: Well, does this teach us anything now for what we should do? Well, the one thing we know as a legal matter is that creditors for other Euro Zone countries who hold local law bonds should have the fear of God in them, because now they've seen how incredibly easy it is to restructure their local law bonds. And going back to Greece, the technique that Greece used vis á vis the local law bonds is actually a fairly gentle technique. It could have been done much more brutally using other aspects of local law. What do we know about the other Euro Zone countries? We know that over 95 percent of the debt of most of the Euro Zone countries that are in danger, is in local law bonds, that means enormous debt relief is waiting around the corner. But should you take the debt relief? And I think here is probably where Anna and I disagree. If I take what my official sector friends tell me, which is that Greece is unique, Greece is over, we never want to see that kind of situation. Again, what can we do? Well, we could try to do something much gentler, which is to go to the creditors who, as I said before, should have the fear of God in them and say, "Look, you have these crappy local law bonds. We're willing to give you a swap. Look at Greece and look at how difficult it has been for Greece to restructure their foreign law bonds." Now, the caveat here is that those foreign law bonds are being restructured at meetings right now over the next couple weeks. I think the dates have been postponed until April 4, but the meetings are scheduled for right now. But if we take for granted that those are much more difficult to restructure, there should be a big incentive for people to exchange the local law bonds for nice, heavily contracted foreign law bonds. How much would they be willing to exchange for? Maybe 20 to 30 percent of a haircut. Now, the question for me then is: Is that enough to get these countries significant relief and get out of the burden of having to constantly do more austerity that really doesn't seem to be taking them anywhere? All right, Anna, it's yours.
Anna Gelpern: Oh! Well, thank you, Alexei, and thank you, Mitu, and thank you to all assembled [Inaudible 00:08:42]. The interesting question about Mitu's remarks to me is: To what extent does the ingenious legal technology that he described, and I actually do think that it is ingenious and I recommend his paper with Jermaine Settlemeyer to all assembled; to what extent does it determine the outcome? And to what extent should it determine the outcome? And I've been repeating this three-part analytical framework kind of over and over in a very boring fashion over the past couple of years. In order for a sovereign restructuring to work, the three dimensions have to align; the political, the economic, and the legal. And I am absolutely persuaded that Mitu can make the legal dimension work. It is the political and economic, and which by the way I have no competence, that gives me pause. So, what have we learned from Greece on the politics? The first unusual aspect of the Greek restructuring is the uncertainty about who makes the decisions and how. In the olden days, debt restructuring was negotiated or decreed by some combination of the debtor and the creditor. The official sector would come in, but this was a fairly simple intervention. Here Greece had no agency from the start, right? So, the decision to restructure or not to restructure that could have been made in April, 2010 was not and, probably given the politics, could not have been made by Greece, right? So, to the extent we're now talking about a restructuring by Portugal and Spain, Ireland, or Italy, who decides to pull the trigger is a crucial question to which I don't think we have an answer. This is related to the challenge of the emerging European, sort of, crisis management architecture that ESM pulled the political architecture of ESM, and the persistent collective action problems within the Euro Zone, right? So the collective action problem, which everyone expected to be among private creditors, in fact, took place in a very colorful fashion among the would-be guarantors of the debtor. So, Finland demanding collateral for its participation is, to me, the most startling example of this collective action problem, where any one of the Euro Zone guarantors can potentially hold the decision hostage to their domestic political priorities. Related is the Troika dynamics, right? Again, in the olden days, there was the IMF program, there was the IMF financing envelope, and there was periodic tension over the next IMF review, but that was something that was relatively predictable compared to the 17 to 27 part collective action circus that unfolds with every European disbursement. And I think that hasn't gone away. So, the politics of the decision-making about restructuring I think is very much up in the air and I think that, more than any legal technology, is likely to determine the outcome. Second, economics. The first Greek debt sustainability analysis didn't look nearly as tragic as the last. Now, Portugal, Ireland, Italy debt sustainability analyses look very similar, so how do we know that Portugal is next and not Ireland and not Italy? Well, there's some very good arguments to why that might be, but, frankly, how do we know that this is the DFA to trust? That is the debt sustainability analysis to trust? And that in turn would determine the terms of the kind of preemptive voluntary swap that Mitu is advocating, right? How much debt relief is enough very much depends on your view of the debt sustainability profile, and how do we know which one to trust? Moreover, if, in fact, all of these countries have more or less the same sustainability profiles, can Europe and the world handle three restructurings? Is there a firewall and what's the possible contagion scenario? Next, and Mitu referred to this when he talked about the evolving composition of Greek debt, the increasing role of the official sector, the entry of new official actors, I'm mostly focusing on the European Central Bank, and the relative treatment of different creditors in the alternate restructuring is critical here, right? So, now we know that the ECB will not participate in their restructuring. We probably know that Euro Zone financing might be extended or the rates might be lowered under the table, but we're not going to have the sort of official sector involvement, as people now like to call it, that we have, let's say, in the Paris Club, right? So, there's a lot of murk about the economics of various creditor groups involved and without having a better grip on that, I don't think we can make an intelligent decision about the terms of a restructuring today. Finally, and most briefly, since Mitu addressed this, the law. What is the relevance of existing institutional and contractual equipment for debt restructuring? So, we have the emerging legal architecture of the European stability mechanism and, on the one hand, the commitment to have collective action clauses and, on the other hand, the sort of increasing wobbliness of the commitment to involve the private sector. What does it mean? I don't know. Should the treaty be ratified? What will be effective, tax and private sector involvement, in the treaty be effective? Again, interesting question mark. Finally, on the famous collective action clauses, right now we seem to have emerged with three flavors. The olden day CACs of the sort that Greece has in its English law documentation, bond by bond, occasionally with aggregation cross-references, are a majority of restructuring provisions. Then we have Euro CACs; these are the clauses that all European countries committed to put in their domestic law debt effective 2013 or maybe later in conjunction with the ESM. And then we have the retro CACs, which Greek refused, and that is the retroactive legislation that imposes majority amendment provisions on the existing debt stock. At a minimum, I wonder to what extent anybody should care about the Euro CACs in domestic law debt if, in fact, having debt under domestic law means the capacity to do whatever you want retroactively whenever you need to do it. And with that, the remaining question is then: Well, why would you surrender that flexibility today for the rather unscientifically determined 20 to 30 percent when you might need it a couple of years from now to get 75 percent or perhaps not use it all? There we go.

noch sehr viel länger....beisst euch durch und lests....

http://www.acus.org/event/greece-effective-model-europes-next-wave-debt-restructuring/transcript