Gold Magazine March - April 2013, Issue 24 | Page 61

THE RELATIVE

SMALLNESS
OF CYPRUS IN
THE OVERALL
SCHEME OF
THINGS CAN BE
SEEN AS EITHER
GOOD OR BAD
FOR 30 YEARS, PRESIDENTS AND FINANCE
MINISTERS HAVE TURNED TO US LEGAL EXPERT
LEE BUCHHEIT TO HELP CALL OFF CREDITORS
WHEN THEIR GOVERNMENTS HAVE RUN OUT OF
MONEY. THE MASTERMIND BEHIND GREECE’S
DEBT RESTRUCTURING HAS BEEN DEALING WITH
SOVEREIGN DEBT PROBLEMS OF ONE KIND OR
ANOTHER FOR SO LONG THAT “IT’S SORT OF BECOME
MY LIFE STORY,” HE TELLS GOLD.
By Kyproula Papachristodoulou

relief that the IMF was saying they needed,
they really had to impose pretty severe terms.
In the end it was a 53.5% nominal haircut
and a 79% net present value haircut. That’s
pretty severe.” He adds that “If you turned
the clock back to 2010 and restructured
everybody upfront, they wouldn’t have had
to ask for as much debt relief from individual
creditors as they did because they would have
spread out the burden over all.”
So what are the lessons learned from the
case of Greece? One, says Buchheit, is that

if you do not buy the existing debt back at
par and thereby force the existing holders to
stretch it out, then one of two things must
be true in the future: either the optimistic
view will prove to be correct and no haircut
will be necessary or the pessimistic view will
prove to be correct and a debt restructuring
will be necessary. The difference is that, in
this case, private creditors would be the ones
to bear it, not the taxpayers.
So, what should one make of all the catastrophic scenarios set out in academic papers

and analyses that strongly recommend
avoiding any kind of debt restructuring in
the future? Another debt restructuring in
the euro area, analysts say, would have a
detrimental contagion effect on countries
like Italy and Spain which are practically on
the edge of the bailout cliff. Lee Buchheit
disagrees with them. “I think the consequences are being overstated. The eurozone
countries are about to use their taxpayers’
money to try and stabilize the situation. It’s
perfectly legitimate for them to say, ‘I don’t
want to pour my taxpayers’ money into
your country and end up to paying holdout
creditors’. The alternative would be to say
to the hedge fund which bought the bond
at 30 cents of the euro, ‘We will pay you
in full because we don’t want to send the
message that we are not credible debtors’.
At that point the investor says, ‘Let me get
this straight: I buy a bond of country X
and I can buy it for 30 cents of the euro.
When it matures, if country X doesn’t repay me, the eurozone will. I will buy that
bond! Why should I buy a German bond
that would pay me 75 basis points when I
can buy a bond of country X at a yield of
14%? As long as the debtors are the same
I will buy the 14% bond of country X, even
if it may not be as stable and prosperous as
Germany!’” Bucheit reminds me that the

THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS

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Gold 61

07/03/2013 11:45