A Bold Proposal to Offer Greece Some Financial Relief
By LANDON THOMAS Jr.JULY 10, 2015
MUNICH — With time running short for Greece to meet a deadline to stay in the eurozone, a small but influential circle of debt experts are putting forward a provocative plan to persuade foreign investors to lend Greece the money it needs to survive.
The proposal aims to make private sector bond investors — not governments and international lenders — the primary creditors when it comes to doling out money to Greece.
Doing so would help overcome what many economists see as the central obstacle preventing Greece from reaching a deal with its creditors. More than 90 percent of Greece’s 310 billion euro debt is owed to public institutions: other European governments, the International Monetary Fund and the European Central Bank.
The proposal is being advanced by Mitu Gulati and Lee C. Buchheit, two well-known debt lawyers who played a central role in the restructuring of Greece’s debt in 2012.
Just two days remain before European leaders meet on Sunday to debate whether Greece stays in or leaves the eurozone. On Thursday, the Greek government submitted a revised list of economic reforms to its creditors in the hope of unlocking fresh funds.
It is unlikely that Mr. Gulati and Mr. Buchheit’s proposal will be accepted as an immediate solution to address the country’s cash crisis. Yet there is a growing sense among Greek and German government officials that the two countries, having come closer than either side expected to an exit plan, will reach an accord on Sunday.
For that to happen, Germany needs to give Greece a strong signal that some debt relief will be coming. And Greece needs to convince its creditors that it is addressing address crucial areas like taxes and pensions.
“I think there will be a deal on Sunday,” said Hans-Werner Sinn, an economist based in Munich who has long advocated that Greece should leave the euro.
Mr. Sinn noted that France was pushing hard to keep Greece inside the eurozone and that Germany would not risk alienating France over the question of Greece.
While such an agreement would prevent the immediate dislocation of an unruly Greek exit, it would not address the more complex problem of Greece’s continued dependence on public sector loans to fund its day-to-day operations.
That is where the proposal put forward by Mr. Gulati and Mr. Buchheit would come in. They see their plan as a way for Greece to gain access to new money and for Europe to avoid more extreme options, like writing down the country’s debt.
“The question really has to be how do we get the private sector back into the game,” said Mr. Gulati, who presented the proposal at a conference on Greek debt held here on Wednesday and Thursday.
European governments do not want to lend Greece any more money, nor do they want to have their debts written down, Mr. Gulati said. So the trick, he argued, is devising a mechanism that can persuade private sector investors to pick up the slack.
Since the onset of the European debt crisis in 2010, Mr. Gulati, a law professor at Duke University, and Mr. Buchheit, a prominent sovereign debt lawyer at Cleary Gottlieb Steen & Hamilton, have floated numerous ideas about how Europe should deal with Greece’s debt.
Some of their proposals have had a direct impact on policy. The best known was a brief they wrote in 2010 that would become the framework for Greece’s landmark debt restructuring in 2012.
Other trial balloons have been politely dismissed.
In the last week, the two men have pitched their initiative to senior economic officials in the Dutch and German governments. They plan to write a formal paper laying out their proposal in more detail in the coming weeks.
They have also emphasized that the plan should not be seen as a way to avoid cutting Greece some slack on its debt.
“This is not a substitute for debt relief,” Mr. Buchheit said. Nor, he added, should it be seen as a way for Greece to escape the tough reforms it needs to put in place to make the economy more functional and efficient.
Still, they say, private-sector bond investors should be granted a powerful incentive to load up on risky Greek debt by being awarded seniority over public sector debt holders.
That means these nongovernment lenders would jump to the head of the line of creditors in terms of who gets paid first if, in the future, Greece does not have enough money to pay all of its lenders.
This is the text of the proposed actions that Greece submitted to its European creditors on Thursday. It lists a series of measures that the nation would undertake in exchange for a new bailout plan.
If the plan is successful, the thinking goes, it will be the global debt market — hedge funds and mutual funds — not the German government or the I.M.F., that decides whether Greece should be able to borrow more money. Most other sovereign governments go to the debt markets to raise money to fund their operations.
Because European taxpayers are on the hook when it comes to Greek debt, the negotiations of the last six months have been driven more by politics than economics. Germany, the Netherlands and even smaller nations like Malta and Estonia have said that Greece should not be allowed to borrow any more money.
It would be more sensible, the two men argue, if European governments agreed to grant seniority to private sector bond investors. Long-term institutional bond investors would thus have a good reason to invest in Greece, even with its daunting debt ratio of 175 percent of gross domestic product.
That is because they would be paid before European governments in the event of a total default.
It is not unusual in crisis situations for government lenders to agree to have their loans demoted to avert a larger crisis and attract private investors, Mr. Gulati said.
Still, it is unclear whether European governments would agree to do this. When a sovereign government is close to default, being a senior creditor is a treasured status that is not casually bargained away.
It is also true that in the wake of the I.M.F.’s call for a debt restructuring in Greece, this approach could be criticized as dancing away from the core issue, which is that, once and for all, Europeans must accept losses on their debt positions.
“The time has finally come for a write-down of Greek debt,” Ashoka Mody, a former I.M.F. economist who oversaw the fund’s bailout of Ireland, said at the conference.
But if the choice comes to having to take a loss on your loans or lending even more money to Greece, ceding your most-preferred-lender status may well be seen as the least painful option.
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