Greek debt restructuring (2012)
The March 2012 exchange imposed on private holders of Greek government bonds, with a 53.5% nominal haircut, made binding by collective action clauses inserted after the fact by Greek law, from which the ECB stayed out.
On February 23, 2012, the Greek parliament passed Law 4050/2012. It inserted into every Greek-law government bond a collective action clause the holders had never signed: if a qualified majority of principal accepted the exchange, everyone was bound. On March 9, 85.8% of Greek-law paper had said yes, the clause was triggered, and the deal ended up covering nearly 97% of roughly 206 billion euros of eligible debt, foreign-law series included. For every 1,000 euros of old bonds, a holder received 315 euros of new Greek bonds maturing 2023 to 2042, this time under English law, 150 euros of short EFSF notes and GDP-linked warrants. Nominal haircut: 53.5%. In present-value terms, around 65% according to Zettelmeyer, Trebesch and Gulati. The same day, the ISDA Determinations Committee declared a credit event, and the March 19 auction set recovery at 21.5%. The ECB lost nothing. A few days earlier it had swapped the bonds bought under its SMP for identical bonds under new ISINs that the law did not reach. Private holders took the haircut, Cypriot banks among the hardest hit, and their losses fed the Nicosia crisis a year later. The English-law series, beyond the reach of the Athens legislature, left holdouts that Greece repaid at par, about 435 million euros on May 15, 2012. For a credit or political risk underwriter, the case turns on governing law. A state that writes the law of its contract can rewrite the contract, and a claim on a public entity governed by local law carries a legislative risk that the same claim under English law carries far less. How the ECB was treated also shows who comes first when a state picks its losers.
Textbook case: a fund holds 10 million euros nominal of a Greek-law series and votes against the exchange. The triggered clause prevails. It receives 3.15 million of new Greek bonds and 1.5 million of EFSF notes, 4.65 million nominal before GDP warrants: a loss of 5.35 million, or 53.5%. With 10 million of CDS protection on Greece, the March 19 auction settlement would have paid it 78.5% of notional, 7.85 million, on top of the new bonds received. The same fund, had it held an English-law series and refused, could have waited for maturity and been repaid at par.
Greek PSI, Greek bond exchange, Greek haircut 2012, Law 4050/2012
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