Greece sovereign debt restructuring was a "success" - Lemierre


Peter Lee, Euromoney Skew
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Jean Lemierre, the current advisor to the chairman of BNP Paribas, struck a contrarian tone when he branded the Greek deal a "success" while the IIF sounded the alarm over the precedent set by the subordination of private creditors in favour of the official sector, in comments at its spring conference

Jean Lemierre, now adviser to the chairman of BNP Paribas, previously president of the European Bank for Reconstruction and Development (EBRD) and before that director of the French treasury, has had a distinguished career in finance.

He can never have drawn so many bemused looks as he did on Wednesday, chairing a discussion of a strengthened framework for sovereign debt crisis resolution at the spring meeting of the Institute of International Finance (IIF) in Copenhagen.

He insistently drew lessons from what he described as the recent “success” of Greece. “Not only is it the largest debt restructuring ever at €210 billion, Greece is the sovereign debt crisis that has been fixed the most quickly,” Lemierre asserts.

This was the supposedly voluntary debt exchange, in which Greece retroactively inserted collective-action clauses in its domestic bonds to encourage participation; private sector bondholders were required to take a hefty net present value loss and subsequently subordinated below a raft of official sector creditors; which delivered so small a quantum of debt forgiveness and with such conditions that the Greek electorate immediately cast out the parties that had negotiated it; that lead to elections later this month which remain the focus of worries about a possible break-up of the single currency, with unknown contagion affects on financial markets and economies in Europe and beyond. 

No one knows what the Greek election will bring or whether Greece can remain part of the single currency, institute structural reforms, restore competitiveness and resume economic growth. But right now, Greece is not fixed and describing its recent experience with debt resolution as a “success” looks to be a bit of a stretch.

Lemierre can at least claim that both official and private sector creditors made concessions in the negotiations that led up to the final deal. The European Financial Stability Facility (EFSF) provided a cash sweetener to private sector bondholders and new bonds were offered governed by English law, potentially offering more protection to private investors.

Yet, as the almost surreal presentation proceeded, one or two voices meekly offered a different slant. Hans Humes, chief executive of Greylock Capital Management, says: “Unfortunately, the Greek restructuring creates concerns for sovereign borrowers going forward to the extent it strips away confidence from buying debt issued under their national laws.”

Clotilde L’Angevin, head of the international division of the French treasury and secretary general of the Paris Club, supports Lemierre’s description of the deal as a “success” and points out that official creditors had been supporting Greece since 2010 when it lost market access.

“The official sector will provide €240 billion at very favourable terms of low interest rates and long maturities, and part of that went to private creditors,” she says.

However, even L’Angevin does not pretend that private sector involvement or official sector provision of funds has resolved Greece’s problems. She says: “To regain market access in the short and medium term, Greece has to implement the programme and the structural reforms.” And she adds: “We must not take from this particular example any quick conclusions, for example about preferred creditor status in any other cases.”

Private subordination

Even though the IIF was thrust into a prominent role in negotiating on behalf of private creditors, Hung Tran, deputy managing director, was scathing. He says: “the subordination of private sector creditors to official sector creditors was without justification in my view. For example, many national central banks bought Greek bonds for extra yield just like any investor but were exempt from the exchange.”

He goes back to the summit decision at Deauville in October 2010 to require private sector involvement. “It was a huge and major mistake with implications to play out over many years to come,” he says. “Earlier emerging market sovereign debt restructurings were typically for countries that had borrowed outside their home market in foreign currency but this was an industrialized country borrowing in its own currency.”

Carlos Steneri, former head of debt management for Uruguay, was on hand to offer some lessons from Uruguay’s negotiated debt resolution that followed the banking crisis there in the wake of Argentina’s default, when Argentines whisked their deposits out of Uruguayan banks.

His presence might have been meant to be reassuring. Uruguay quickly regained market access after 2003 and recently returned to investment grade. But Steneri had other lessons that might not have been so welcome.

To prevent future vulnerability to contagion, Uruguay imposed a 100% reserve requirement on deposits from Argentina in its banks, prevented Uruguayan bans from buying Argentine bonds or lending to it and redirected its exports elsewhere. It wants good relations with its neighbour across the river plate but has had its fill of economic integration.

Recently, talk has revived of the so-called Sovereign Debt Restructuring Mechanism (SDRM) procedure, with the IMF as arbiter of sovereign debt restructurings. That idea attracts almost zero support, with the IMF now cast firmly among the preferred creditors as a principal participant rather than an honest broker and one likely to be paid back more if private investors are paid back less.

Some framework for private negotiations will have to be found if there is to be another sovereign debt restructuring in Europe before all this is over.

Humes takes the last word on the success of the Greek deal: “I hope Greece is not the template.”