Gold Magazine March - April 2013, Issue 24 | Página 62

DEBT

countries of the euro area have mandated the
inclusion of an aggregated collective action
clause (CAC) in every eurozone sovereign
bond issued after January 1, 2013. Collective
action clauses are a supportive tool to debt
restructuring. “They have clearly sent the
message to creditors that, if there is a future
debt problem in any of the euro area countries, they will restructure its debt,” he explains. “For bonds that mature in the future,
the Europeans have already philosophically
embraced debt restructuring. CACs say that if
there is a super majority of affected creditors
who decide that the restructuring is necessary,
this majority should be able to bind any minority that takes a different view,” Buchheit
notes, adding, “Otherwise, if the minority are
allowed to recover the full amount of their
claims, the money will have to come from the
people who have been restructured.”
So is he suggesting that investors should
assume responsibility for buying sovereign
bonds? “Exactly! Every investor who buys a
corporate bond or a loan knows that if the
company gets into trouble he might find
himself in Chapter 11 or some equivalent
bankruptcy regime. That has not stopped
investors from buying corporate bonds. It is a
fantasy to think that an investor in sovereign
debt would run away from all debt instruments because he might be brought into a
debt restructuring against his will.”
Public or official sector involvement (OSI)
in sovereign debt restructurings is currently
considered anathema, as eurozone leaders’
statements and the facts have shown. Will
there be a time when the official sector will
get involved? “I do not think that it is possible before the German election this year,”
says Buchheit. “Ask me the same question the
same day next year and I will an swer ‘yes’.”
For Buchheit, OSI is the almost inevitable
consequence of the policy that Europeans
have chosen to implement. “They chose to
pay out the existing creditors in full. In doing
so, they took the risk that if the country eventually needed a debt restructuring in order to
achieve a sustainable debt profile, that restructuring was going to affect them. Why they
could not see that at the beginning I don’t
know but they certainly have seen it now!
The moment they perceived that as a threat
in Greece, they instantly switched to saying,
‘Bring the private creditors in to save us from
doing something’. In fact there has already

IT IS A FANTASY TO THINK THAT
AN INVESTOR IN SOVEREIGN DEBT
WOULD RUN AWAY FROM ALL
DEBT INSTRUMENTS BECAUSE HE
MIGHT BE BROUGHT INTO A DEBT
RESTRUCTURING AGAINST HIS WILL
been OSI. It hasn’t involved a haircut but
they have extended for a very long time, they
have cut the interest rate all the way down.
They already done everything they could
apart from haircutting the principal. So OSI
has already come. This time next year they
may decide to extend the maturities until the
end of time. That is something which will
not change the debt-to-GDP percentage of a
country but it will certainly give the country
decades in which it can borrow from the
private market without worrying about the
official sector repayments.”
According to Lee Buchheit, the world’s
debtor countries have five options at their
disposal to deal with their debts. One of
them has been adopted by Spain and Italy
which have announced and implemented
voluntary fiscal adjustment programmes.
“Their aim, of course, is to restore their fiscal situation and convince the markets to
continue lending them at reasonable interest
rates,” he explains.
Option two is to give yields a “massage”,
in other words to have active official state
intervention or ECB purchases of bonds to
keep market rates low. Alternatively the state
could offer asset-backed bonds, allowing
them to be accepted by the market but for
these, Buchheit points out, “the track record
is not considered good”.
Buchheit’s third option entails a full bailout in the case where the debtor state is unable to pay its maturing loans (as in the case of
Cyprus). Germany and other eurozone countries (i.e. their citizens) pay the cost through
loans. There is, though, a fourth option: debt
restructuring which might include a moratorium on payments, extending the repayment
period or reducing the interest rates. In such
a case, the lenders pay part of the cost either
in terms of current prices or through a loss of
net present value. The fifth and final option
is a Greek-style restructuring that includes a
haircut loss for lenders.

What is Lee Buchheit’s prediction for
Cyprus? He is not entirely sure.
“Cyprus has a maturity of €1.4 billion
due in June, which is roughly equal to 8.5%
of the country’s GDP. I don’t think Cyprus has the money to pay that on its own
and it does not enjoy access to the markets
that will allow it to borrow the money. So,
one of two things must happen,” he says.
“Either the official sector gives Cyprus the
money to repay its loans or it doesn’t. If it
doesn’t, that’s just another word for restructuring. If it does, it puts itself on the path
that started in Greece but was reconsidered.
We will have to wait and see. I honestly
don’t know what choice they are going to
make. The relative smallness of Cyprus in
the overall scheme of things can be seen
as either good or bad. You can argue that
the amount of money necessary to bail out
Cyprus is so small that even if the official
sector ends up taking all the Cypriot debt
stock on its own shoulders and then has to
restructure it, it’s not that much money.
The other side of the argument says that
if you want to send the message that the
Europeans are no longer in the business of
monetizing debt instruments and paying
back existing creditors who have made a
bad decision, what better place to do it than
in a small country?”
Doesn’t the fact that a large part of the
Cypriot debt is owned by Cypriot institutions place a serious obstacle in the way of
any kind of debt restructuring or haircut?
“That is a complication,” Buchheit acknowledges.
”Everyone knows that the banking sector
will need to be recapitalized. So, if you were
to try to restructure Cypriot sovereign debt
in a way that caused losses to the holders,
it’s another way of saying that the amount
the Republic will save in debt services will
have to be paid back in the form of recapitalization. This is a crucial point.”

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

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07/03/2013 11:45