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."
Greece had two major factors on its side. The first was that the vast majority of its mountainous debt—some 92 percent—was in the form of bonds. This meant that it would be able to avoid the complexities and intercreditor rivalries that dogged the restructuring of Iraq's national debt, for example. (Iraq's diverse creditor base resulted in more than 13,000 individual claims that had to be settled separately.)
The second was that over 90 percent of its debt stock was governed by Greek law, opening up the possibility of using legislative powers to facilitate the restructuring through a change of law. "The question was how to use that local law advantage in a way that didn't set too thermonuclear a precedent and frighten people away from investing in countries that issue [bonds] under their own law," says Lee Buchheit, who led an eight-office team at Cleary Gottlieb Steen & Hamilton representing Greece.
As it happened, Buchheit had already answered that question back in May 2010—more than a year before the firm was even retained on the matter. In an academic paper he coauthored with Duke University law professor Mitu Gulatien titled "How to Restructure Greek Debt," Buchheit proffered the use of collective action clauses (CACs)—a contractual mechanism that subjects bondholders to the terms of an amendment or restructuring if a specified majority agree.
The problem was that Greece's existing bond contracts did not contain CACs or any other provisions to alter the terms after issuance. The Greek government therefore took the unprecedented step of passing new legislation ahead of the PSI transaction to retrofit the Greek law bonds with a statutory CAC—the first time CACs had ever been implemented retroactively in a sovereign debt restructuring.
The insertion of aggregated CACs helped Greece avoid having to deal with troublesome "holdout" creditors—those that refuse an exchange offer in the hope that the restructuring will take place regardless and that their bonds will be paid out in full, which Buchheit describes as "the great bane" of sovereign debt restructurings.
And Buchheit should know: His firm is currently representing Argentina in its protracted restructuring, which for the past decade has been bogged down in fierce litigation with holdout creditors such as U.S. hedge fund Elliott Management following the country's 2002 debt default.
In fact, Ian Clark, who jointly led White & Case's team advising the private creditor steering committee alongside fellow London partners Michael Doran and Gavin McLean, says many of the Greek creditors were facing political pressure to play ball. "This wasn't just a legal transaction—we had to work within a whole range of political and macroeconomic constraints," Clark explains. "In a normal restructuring, the creditors might have been prepared to take a much more robust position, but the large banks holding positions in Greek paper [European banks were the largest holders of Greek bonds] were under huge pressure from their home governments to go along with the restructuring process at almost any cost because there was such concern over the consequences of a disorderly default. It's not like we were looking for litigation—we all recognized that would be a road to nowhere for everyone but the lawyers—but unless there's a risk that a creditor is actually going to enforce its rights, the debtor has no incentive to ever make payments."
In an attempt to allay such fears and maximize participation in the PSI transaction, Greece introduced a novel cofinancing arrangement that linked its payment obligations under the PSI bonds to its obligations under €30 billion of the loans provided to the country by the European Financial Stability Facility (EFSF)—a Eurozone-financed bailout fund that was advised throughout the crisis by Clifford Chance banking partner Jonathan Lewis.
Put simply, it meant that Greece would not be able to default on the PSI bonds without simultaneously defaulting on the EFSF loan, ensuring pari passu status between its private and public creditors.
"It reassured the [PSI] bondholders, as sovereigns will do anything to avoid damaging its relationship with its official sector sponsors," Buchheit explains.
The restructuring was an overwhelming success. Approximately 97 percent of the bonds invited to participate in the PSI transaction were exchanged, wiping out more than €100 billion of debt. Financial catastrophe averted, Greece and its European partners were able to move forward. Unhappily, and still struggling, perhaps, but also still solvent.