Gold Magazine March - April 2013, Issue 24 | Page 60

DEBT

The King of
Sovereign Debt
Restructuring

THE MESSAGE
TO CREDITORS IS
THAT, IF THERE

IS A FUTURE
DEBT PROBLEM

IN ANY OF THE
EURO AREA
COUNTRIES,
THEY WILL
RESTRUCTURE
ITS DEBT

O

n June 3,
2013, a
€1.4 billion
Eurobond
issued by the
Cyprus Government has
to be repaid.
By that date, the island will have to have
secured – one way or another – the necessary funds. Bearing in mind the examples
of Ireland and Portugal, whose economies
were bailed out by EU and ECB funds, one
might be forgiven for saying “So what’s the
problem for Cyprus?” The new government
is, after all, expected to finalise a Memorandum of Understanding with the Troika
shortly.
But things are not quite as simple as that.
While the island’s debt-to-GDP ratio currently stands at around 84% (the same as
the present EU average), the net cost of the
bailout could push it up to around 135%
or 140% of GDP, a figure which, according to EU and IMF officials, is not sustainable. And this is where the main problem
arises.
Over the past weeks, analysts have written papers, rating agencies have issued
warnings and a number of respectable institutions have published announcements.
Many – though not all of them – have

come to the same conclusion: very few options are open. Imposing losses on Cypriot
bond holders or unsecured depositors is a
move that would reduce the debt burden and
potentially make it sustainable but it is not
recommended for a number of reasons related to the survival of Cyprus as an international financial centre, contagion risks in the
eurozone as well as the view that “a material
shift in public policy on bank bailouts would
be credit negative for European banks”, as
Moody’s noted in a recent report.

Lee Buchheit of Clearly, Gottlieb, Steen
and Hamilton LLB, is the international
legal expert from the US who crafted the
restructuring deal that cut Greece’s debt by
€100 billion and inflicted huge losses on
bondholders in March 2012. Buchheit says
that the Greek case, despite the repeated
claims of European leaders, is neither unique
nor exceptional. “What was done for Greece
was indeed unique and exceptional and it
will stay so until it is done again,” he says
with a cynical smile. “In order to get the debt

60 Gold THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS

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07/03/2013 11:45