An Architect of a Deal Sees Greece as a Model
Reuters
An abandoned construction site
in Funchal, Portugal, on the island of Madeira. Portugal is seen as a
debt restructuring candidate.
By LANDON THOMAS Jr.
Published: March 6, 2012
MADRID — Now that Greece is close to completing the largest bond
write-off on record, should other debt-plagued nations in Europe follow
its lead?
Megan Morr/Duke Photography
Mitu Gulati, a law professor at Duke, wrote about Greece's debt crisis in 2010.
Lee C. Buchheit, a lawyer in New York.
That thought is anathema to most policy makers in Europe, where the main
stock indexes were down more than 3 percent for the day on Greek
jitters and gloomy new data on the global economy. European officials
hold the view that Greece’s debt problems are unique and that there is
no need for countries like Portugal, Ireland, Spain and Italy to push
creditors to accept losses on their holdings.
But the intellectual fathers of Greece’s intricate bond swap beg to differ.
Mitu Gulati, a charismatic law professor at Duke, and Lee C. Buchheit,
the philosopher king of sovereign debt lawyers and a lead adviser to
Greece on the deal, see themselves as sovereign debt taboo-busters. And
they are not shy about pressing their views, as Mr. Gulati did with
characteristic wit at a sovereign debt conference here last week.
Instead of presenting an arcane paper on debt guarantees, Mr. Gulati
titillated his audience by calling for other heavily indebted countries
in Europe to carry out their own Greek-style swaps, albeit with smaller
haircuts for creditors because the other nations are not as deeply
indebted as Athens is.
“Lee probably could not say this, but I can because I don’t have
clients,” Mr. Gulati said with a chuckle, as he offered his apologies
that Mr. Buchheit could not attend. “Although I wish these were the
views of Lee’s clients.”
During his 35-plus years at Cleary Gottlieb Steen & Hamilton, in New
York, Mr. Buchheit has secured groundbreaking debt restructuring deals
in numerous countries in Latin America, and more recently in Iraq and
Iceland.
Mr. Gulati’s argument
was fairly straightforward. Instead of repeated bailouts and a lost
decade of austerity in Southern Europe, countries should at least soften
the blow by cutting a deal directly with their creditors to reduce
their debt loads.
Indeed, he argued, no time is better than now, with investors fearing
that some other country — Portugal, in the eyes of many — will copy
Greece’s move to unilaterally impose so-called collective action clauses
that require even reluctant bondholders to go along with the majority
on a deal.
Portugal’s finance minister has said in interviews that his country
plans to fully honor its debts. But investors’ skepticism is presumably a
reason that the yields on Portugal’s long-term bonds have risen by two
percentage points in the last two weeks.
No one suggests that the steps Mr. Gulati is recommending would come
easily. And he joked that his friends at the European Central Bank have
urged him not to spread this idea too widely.
“I asked them, ‘Why not?’ ” Mr. Gulati recounted. “And they said, ‘Because then everyone will do it.’ ”
By any measure, Mr. Gulati and his longtime mentor, Mr. Buchheit, have
become the most potent double act now playing on the sovereign debt
circuit. It was their joint paper
in May 2010 that first proposed a way for Greece to force investors who
reject a deal to suffer the same loss as those who agreed.
Greece, which hired Mr. Buchheit and his team of lawyers last July, has
followed this strategy to the letter. On Thursday night Greece will
disclose what percentage of investors have agreed to the deal. It is
widely expected that the collective action clause will be invoked to
reach the official target of 95 percent participation.
“Lee has seen this movie many times before,” said Petros Christodoulou,
the director general of Greece’s debt management agency. “He is always
five steps ahead of the game.”
On the face of it, the two debt exorcists are a bit of an odd couple.
Mr. Gulati, 44, is a bond contract specialist who enjoys digging into
the ins and outs of negative pledges, pari passu and other boilerplate
arcana. He skillfully cloaks his power résumé — Harvard Law and a
clerkship with Samuel A. Alito Jr. before he became a Supreme Court
justice — with a slightly slouchy demeanor. He delivered his address
last week while wearing chinos and a casual pullover.
Mr. Buchheit, a graduate of Middlebury College in Vermont, with law
degrees from the University of Pennsylvania and Cambridge, is 61 and has
more of an old-world mien with his dapper mustache, nicely cut suits
and gentlemanly manner.
Mr. Buchheit is recovering from an illness and could not be interviewed for this article.
“Everyone in this field is a D.O.B.” — disciple of Buchheit — “whether
they like it or not,” said Adam Lerrick, a sovereign debt expert at the
American Enterprise Institute. “Lee has spent his career trying to
create a system where debtor countries and their creditors can
restructure government debt without intervention by the official
sector.”
The tools of Mr. Buchheit’s trade — collective action clauses, exit
consents and trust indentures — may be complex, but they serve a basic
aim: giving a debtor country the necessary leverage to compel all of its
unhappy creditors to accept losses on their holdings when necessary and
thus achieve meaningful debt relief.
Which doesn’t earn Mr. Buchheit popularity among bondholders. Many of
them see him as an evil genius, confecting legal tricks that make it
easier for indebted countries to shirk their financial obligations — and
in the process saddle investors with losses.
So what does it feel like to be on the other side of the table with a Buchheit client?
“Brutal,” said Hans Humes of Greylock Capital, who agreed this week,
along with representatives of 11 other financial institutions, to accept
an effective 75 percent loss on the value of his Greek bonds.
“Creditors have less recourse when he is involved — but that is his
job.”
Mr. Buchheit’s most recent move was to figure out how to take advantage
of the fact that Greece’s bonds were governed by local law, as a way to
drive a hard line with creditors.
Mr. Gulati, who worked for Mr. Buchheit in 1994 as a junior lawyer
before moving to academia, says that the notion was first raised by one
of his students. The student noticed that under local law the contracts
of Greek bonds did not contain collective action clauses and other
provisions that one usually finds in foreign law bond contracts to
explain what will happen if a debtor cannot fully pay an obligation.
Mr. Gulati and Mr. Buchheit were perplexed. How could Greece restructure its debt without the necessary tools?
Then the answer hit them. Far from being a disadvantage, the fact that
Greek bond contracts were in effect amendment-free meant that smart
lawyers like Mr. Buchheit could custom-design a collective action clause
in Greece’s favor.
In their May 2010 paper the two men argued that Greece was actually in a
better position than any country in modern history to achieve
meaningful debt reduction. The paper was little noticed at the time,
especially because European leaders were then refusing to accept even
the possibility of a debt restructuring.
But a clever campaign of media outreach and global conference-hopping by
the two soon brought the idea to a wider audience. Eventually the Greek
Finance Ministry came calling.
In many ways, Mr. Buchheit’s prodigious publishing output makes him more of a deal professor than a deal maker.
Sean Hagan, the top lawyer for the International Monetary Fund, says
that the Greek debt deal is just the latest example of Buchheit blue sky
thinking’s becoming policy. “Lee has shaped the law in this area,” he
said.
Still, as the latest act in the Greek debt drama approaches its climax
there is no sign yet that other countries are ready to adopt the
Buchheit-Gulati model. At the conference in Madrid, a senior official
from Spain’s central bank took immediate issue with Mr. Gulati’s debt
swap proposal, calling it “very risky” and wrongheaded in every way.
In Portugal, where Mr. Gulati is teaching a class this week and many see
a debt restructuring as inevitable, officials continue to insist that
the country’s debt burden is manageable. Investors, however, appear
unconvinced. The country’s 10-year bond yield has almost doubled to 13.5
percent since Portugal’s 78 billion-euro bailout, then worth $116
billion, last spring.
With markets already pricing in a debt restructuring of some sort in
Portugal, a voluntary haircut would probably not spur a broader rout.
For larger countries like Spain and especially Italy, however, the
contagion risk would be greater from an attempt to renegotiate the terms
of debt.
Nonetheless, Mr. Gulati argues, the longer that deeply indebted
countries postpone the inevitable, the more expensive the ultimate bill
to taxpayers will be.
“Let’s show everyone that we have learned something from Greece’s
suffering,” he said. “But our time to do this is limited.”
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