Charles
Dallara of the Institute of International Finance, represents private-sector
bondholders, and met with Prime Minister Lucas Papademos of Greece and his
deputies. While both sides have tried to
adopt a conciliatory tone, the threat of
a disorderly default and the spread of contagion to other vulnerable
countries like Portugal remains strong.
At the root
of the dispute is a growing insistence on the part of Germany and the
International Monetary Fund that, as Greece's economy continues to collapse, its debt -- now about 140% of its gross
domestic product -- needs to be reduced as
rapidly as possible.
To summarize:
These two powerful actors, Germany and the IMF -- which control the purse
strings for current and future Greek bailouts -- have pressured Greece to adopt a more aggressive attitude toward its
creditors (e.g. the predatory hedge funds).
Because of this, Greece has
demanded that bondholders accept not only a 50% loss in accepting their new substitute
bonds, but also a lower interest rate on those substitute bonds. That is a tough pill for investors to
swallow, given the already steep losses they face; it means they would be subjected to total losses
of about 70 percent!
The lower
interest rate would help Greece by reducing the punitive amounts of interest it
pays on its debt, thereby making it easier to cut its budget deficit.
To increase
Greece's leverage, the country's negotiators have said they could attach
collective action clauses to the outstanding bonds, a step that would give them the legal right to saddle all bondholders
with a loss. This would in particular
be aimed at the so-called free riders -- speculators who have said they will not agree to such losses and who
are essentially betting that when
Greece receives its aid bundle in March, their bonds will be repaid in full.
If the
collective action clause is used -- and Greek officials say it could become law
next week -- these "free-rider' investors, who bought their bonds at around 40
cents on the dollar, are likely to suffer a major loss. That, in turn, could prompt the lawsuits from
investors claiming in the Court of Human Rights that their property rights had
been violated, because Greece is changing the bond contract retroactively.
With their
considerable financial resources, some hedge funds may be willing to pursue
such a route, and they point to similar cases won by hedge funds in Latin
America. While the prospect of Greece
paying an investor any time soon is slim, the country wants to avoid a parade
of lawsuits across Europe, which would restrict its ability to raise money (i.e.
sell more bonds) in international markets.
Argentina, which defaulted on its debts in 2002, still faces legal
claims from investors that have made it nearly impossible for the country to
tap global debt markets, i.e. sell more bonds, borrow more money.
And it is
not just the legal cudgel that investors are threatening to use. Some hedge funds have discussed the
possibility of demanding a side payment, as they describe it, as a price that
both Europe and Greece must pay if the two want these hedge funds to participate in the
agreement.
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