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Could Grexit follow Brexit?

By Panos Chatzinikolaou

In the summer of 2015, the EU saw one of the most turbulent times in its 60-year history.

The election of the radical-left party SYRIZA, and its leader Alexis Tsipras, put Greece on a collision course with its creditors – the IMF, the European Commission (EC) and the European Central Bank (ECB) and the driving force behind the last two, Germany. The result? EU leaders had to sit at the negotiating table for more than 24 straight hours to avoid ‘Grexit’ – a Greek exit from the Eurozone. And they did.

Almost two years on, many things have changed in the Union – the refugee crisis has intensified, nationalism has significantly strengthened, and of course, the UK voted to leave the European Union.

One thing, however, has remained the same; talks between Greece and its creditors are once again on the verge of collapsing, and Grexit looms. What was originally a negotiation process supposed to be resolved at the December 2016 Eurogroup, is still being discussed and, almost six months later, a solution is still not in sight. Germany and the IMF are unable to agree on whether Greece’s debt is sustainable; as a result of mutual veto the process cannot advance. The Greek economy remains stagnant, eagerly anticipating some sort of liquidity injection and relief, currently asphyxiating under the renewed deadlock.

Although some may argue that there are more important developments taking place in Europe this year, such as the French and German elections, the importance of the troika (EC, ECB, and IMF) negotiations with Greece should not be underestimated.

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Argentina debt restructuring deal – 15 years too late!

By Kanad Bagchi

Argentine-flag-diveOn 28th February 2016, Argentina finally reached a settlement with the rest of its holdout creditors lead by Elliot Management in what is being hailed as ‘historic’ signalling the return of Argentina to international bond markets. While the pesky details of the settlement agreement are yet to be hammered out (at the time of writing), it is however known that in substance, Argentina has agreed to shell out a total of around $4.4 billion to the holdouts including Elliott Management, Aurelius Capital Management, Davidson Kempner and Bracebridge Capital. In sum, that represents a 25% write down of the original debt amount previously owed to the funds. While indeed, the present agreement unlocks Argentina’s financial leg room in the international capital market, thus providing a fillip to its already distressed economy, the agreement is also a manifestation of almost 15 years of desolate and futile negotiations, characterized by opportunity costs, derailed investments, scarce liquidity and immense deadweight losses leading to a general reduction in economic welfare. That apart, one wonders whether it is ethical or moral for a few set of private funds to arm-twist a sovereign into a contractual enforcement claim, that causes at best a deflection of governmental resources towards defending such claims and at worst, obstruction and hindrance in performing essential governmental functions. Moreover, in the present instance, there was every possibility that the deadlock would have continued unabated, lest for Judge Griesa’s unflinching stance towards a resolution. By indicating his disapproval for continuing with the ‘no pay-out’ injunction against Argentina, which had hitherto allowed a leverage to the holdouts in the negotiations, Judge Griesa tilted the balance in favour of Argentina, finally leading to the settlement.

Flashback to 2012 and readers will remember that Greece, during its debt restructuring phase, had similarly experienced a holdout situation characterized by a minority group of bondholders demanding for a full pay-out. It was indeed to avoid a long drawn court ligation, that Greece readily agreed to pay the holdouts in full (around €6billion), inviting criticism from various quarters for its compromising stance and for setting an undesirable precedent.

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The Ultimate Sovereign Debt Showdown: Russia & Ukraine likely to battle it out in court!

By Kanad Bagchi

Against the backdrop of acute political instability, civil war, the loss of Crimea, and a debilitating state of public finances, Ukraine remarkably secured a debt restructuring deal with its international bondholders on 27th August 2015, potentially augmenting its case for a $40bn bailout from the International Monetary Fund. The restructuring package envisaged a principal reduction of around 20% of the total $18bn debt outstanding along with a debt rescheduling arrangement until 2019. The deal has been vociferously hailed as a ‘significant milestone’ and one, which is likely to restore the ‘debt sustainability’ of the Ukrainian government. Amidst a cohort of international financial institutions, including Franklin Templeton, BTG Pactual, Rowe Price et al, agreeing to the haircut, Russia, which holds $3bn worth of those US dollar dominated bonds (just ‘bonds’ hereafter), refused to participate in the negotiations and insisted on being repaid in full. Both countries, having dilly-dallied for weeks since the initial restructuring deal, are now considering to resolve their dispute over the debt in a London court. In this regard, the bond agreements are governed by English law and are subjected to the jurisdiction of British Courts. Political skirmishes aside, this post considers some of the intricate questions connected with sovereign debt enforcement in general and speculates on the likely set of legal issues arising out of the present dispute in particular.

One of the main sticking points of the present controversy relates to the nature and scope of the bonds that were issued by the Ukrainian government, and in particular whether these count as official or private debt. The distinction is important for two specific reasons. First, Russia can validly insist on restructuring of official debt under the umbrella of the Paris Club, as opposed to the recently agreed private creditor-debtor arrangement. Second, legal defenses available to Ukraine in a debt enforcement action by Russia would vary substantially depending on the form and substance of the bonds and whether these are categorized as official or private debt.

Bilateral State Loan or Private Debt?

If the matter reaches the English courts, a ruling on the status of the debt becomes imperative. For starters, the Russian government acquired the entire 3 billion worth of Ukrainian government issued bonds, as a partial fulfillment of a previously agreed loan disbursement to the erstwhile government of Ukraine under President Viktor Yanukovych. Reports suggest that an artificially low interest rate of 5% was agreed on the bonds, when the market, admittedly was demanding far higher rates. In addition to that, a debt acceleration clause giving Russia the option of immediately reclaiming the entirety of the funds, in the event of Ukraine’s debt to GDP ratio exceeding 60%, posits an unusually compromising financing arrangement, further confounding the distinction between private and official debt. In the author’s opinion, the peculiarities of the transaction highlight the fact that the bond issue and its purchase was both creditor specific and materially distinct, in as much as the Russian initiative lacked a purely commercial motive and a profit rationale. Such unconventional issues of securities add a strategic, if not a completely official flavor to the transaction, thereby admitting a characterization of the bonds as official sector debt, regardless of its form. That said, the present indeterminacy has nonetheless stimulated an intensely polarized debate amongst academics and practitioners alike and one hopes that a court decision will infuse more clarity and coherence on an issue, which is both novel and unprecedented. (For a fuller exposition of the debate, see here and here).

Can Ukraine Validly Resist Debt Enforcement by Russia Assuming that Debt is ‘Official’?

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The Greek Referendum: Popular Verdict or Foregone Conclusion?

By Eleftherios Antonopoulos

It is easy to blame the yes campaign but hard to account for its 38.69 per cent in a snap referendum framed as foregone conclusion

In the early morning hours of Saturday June 27, Greek TV programmes were interrupted by an address of the Prime Minister. Alexis Tsipras had announced the abrupt end of the country’s negotiations with the institutions and asked for a popular vote on the latest proposal on the negotiating table, which he framed as an “unacceptable ultimatum”. Within a couple of hours a run on bank ATMs broke out, prompting the government to impose a bank holiday on 28 June.

For political analysts a potential plebiscite that would be held in a state of financial emergency posed an extraordinary case. For the economy of this essay, three aspects deserve more explanation.

Greek referendum 2015 map
Results of the Greek bailout referendum on 5 July 2015. Percentage of No votes (CC BY-SA 4.0)
First, there are several irregularities surrounding the first referendum to be held in Greece since 1974. Hardly ever has an EU member state held a referendum allowing only a five day campaign period. Legal opinion was divided, with constitutional lawyers stressing that the Greek constitution forbids a referendum on monetary issues. The Secretary of the Council of Europe also suggested that holding a snap referendum was falling short of international standards. Most crucially, there was ambiguity from the government on the definitiveness of the decision to hold a referendum adding up to the confusion of the public, the media and opposition groups. The Greek Council of State following an appeal, only deemed the referendum constitutional on Friday the 3rd of June.

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Greece’s creditors are paying the price for not relaxing their conditions prior to the 2015 election

By Stephanie J. Rickard

With no deal reached between Greece and its creditors despite months of negotiations over the release of further financial assistance, the country opted to delay a €300 million debt repayment to the International Monetary Fund (IMF) that was due on 5 June. The Greek government now intends to bundle together several payments totalling €1.6 billion into a single payment due on 30 June, while fresh proposals have been communicated to creditors in an attempt to secure additional bailout funding.

Credit: IMF

This impasse could have been avoided. The IMF, an institution that for decades has loaned money to countries in distress, successfully sidestepped Greece-like drama in the past. The IMF accomplished this by relaxing the reforms required of borrowers in the run up to elections. In a recent study, I and my co-author Teri Caraway, find the IMF softened mandated labour market reforms in loans negotiated within six months of a pending election. The further away elections were, the more stringent the reforms required in exchange for financing.

The IMF typically softens required reforms prior to elections to avoid precisely the situation now playing out in Greece. Tough reforms give opposition parties ammunition to use against the government and increase the chances that the incumbent parties will lose. In Greece, the painful austerity policies demanded by international lenders resulted in a series of convulsive protests that shook the nation and ultimately led to the election of a new anti-austerity government under Syriza in place of the previous New Democracy-led government fronted by Antonis Samaras.

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The Systemic Nature of the EU Crisis: Reflections on a Deepening Issue

By Mark Esposito

batch001-008The Eurozone has entered its fourth year of crisis and 2013 has been a challenging year for a large number of Member States, who have been falling into severe debt, requesting bailouts tied to crippling austerity measures. If we thought the issue was namely a Greek syndrome, this year has proven otherwise.

Instead of providing some relief, the austerity measures are only making matters worse. Like dominoes, successive member states find themselves on a negative economic watch. Living conditions have deteriorated and unemployment rates have been skyrocketing[1]. In the last four years, Europe has witnessed countless strikes and demonstrations, two hung parliaments, razor-sharp elections wreaking havoc with the stock market and the advent of capital controls on private finances. What began as a financial and banking crisis in 2008 has turned into a social crisis and a crisis of the European identity; probably the worse the European Union has ever experienced in its lifespan.

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