Saving the World
Global Finance Deal of the Year, Public Restructuring: Greece's Debt Restructuring
Honorees: Allen & Overy; Cleary Gottlieb Steen & Hamilton; Clifford Chance; The Hellenic Republic; Karatzas & Partners; Koutalidis Law Firm; Linklaters; Sidley Austin; White & Case
Rarely has a piece of legal work carried such wider significance as the historic restructuring of Greek's national debt.
The numbers involved are simply staggering: €206 billion of debt; over 90 jurisdictions; 135 series of old bonds in four different currencies, held in six separate clearing systems; 30 bondholder meetings; 20 series of new bonds; and advice from more than 80 lawyers at six Global 100 law firms. It was the largest sovereign debt restructuring in history; the first restructuring of a sovereign that is a member of a currency union (Greece is one of the 17 member states of the Eurozone, which shares a common currency, the euro); and the largest-ever bond exchange.
The stakes were impossibly high—and not just for Greece. A disorderly default would have seen Greece's faltering economy collapse, prompting the country's likely exit from the Eurozone—something former Greece Finance Minister Yannos Papantoniou described last summer as a "nightmare scenario." Countries across the region would have risked being plunged back into a recession, and with most of Greece's debt held by major European banks, it could even have triggered another global financial crisis.
The seismic importance was not lost on the lawyers working around-the-clock to put the deal together.
"People really thought the end of the world was coming—at times the tension almost made me sick," says Yannis Manuelides, a Greek-born finance partner based in the London office of Allen & Overy, which alongside White & Case served as cocounsel to a steering committee of private creditors. "I've worked on lots of other demanding deals, but never felt quite the same grip in my stomach. There was a real sense that if we don't get this right, it's bad news for everyone."
In the fall of 2009, Greece's newly elected prime minister George Papandreou sent shockwaves through European markets by admitting that his country's economy was in "intensive care," with national debt having spiraled to €262 billion ($348 billion). Ratings agency Fitch Ratings Inc. responded by downgrading Greece's credit rating for the first time in a decade amid fears of a possible catastrophic default. In a desperate attempt to take control of the quickly deteriorating situation, the Greek government introduced swaths of tough austerity measures, causing widespread labor strife and civil unrest, but it wasn't enough. In May 2010, with Greece's total debt standing at approximately €319 billion ($424 billion), the country was forced to accept a €110 billion ($146 billion) bailout.
That did little to improve matters, however, and in early 2012, with Greece's outlook still worsening by the day, the European Union finalized a second bailout package for the country.
But this €100 billion ($133 billion) loan had a catch: It came with a precondition that the private sector share some of the burden. The so-called private sector involvement (PSI) agreement specified that private holders of Greek government bonds accept a 50 percent write-off to the nominal value of those bonds, equating to an overall loss of around 75 percent.
"It was pretty unusual compared to other sovereign restructurings," Manuelides adds. "We didn't actually have a sovereign declaring default—we had other European countries dictating what needed to happen if Greece was to get a new rescue package. The creditors were effectively told that if they don't agree to the write-off, there won't be a new rescue package, Greece will go into default, and they will lose everything. That's the game one plays in any restructuring, of course, but the very real risks here made it a pretty strong incentive."