In the grand scheme of Greece’s debt problems, the sum of approximately €450m may appear modest but tomorrow (15 May) the next repayment of principal is due on foreign law bonds issued by the Hellenic Republic. In a high stakes version of Morton’s Fork, whether the fractured Greek government decides to pay or default there are potentially undesirable outcomes.
As the bonds due for repayment are governed by English law the Greek government will find it difficult to impose its own will upon the bondholders. Followers of the crisis will recall that Greece forced through the restructuring of Greek law governed bonds by enacting new legislation, with retrospective effect, that allowed the government to enforce collective action clauses. They have no such power with foreign law bonds. At the end of March, Greece put a restructuring proposal to the holders of the outstanding 36 foreign law bonds, and in 20 cases the proposal was not passed, including the bond due for repayment tomorrow.
Greece finds itself with a stark choice: default or pay up.
Default and Greece can expect the holders of the bonds to give their lawyers the green light to prepare lawsuits to be filed on the expiry of the 30 day cure period. Add to the mix the inevitable arguments concerning breaches of negative pledges within the foreign-law debt instruments, and also creditors seeking to attach other assets under the emanation principle, and Greece will find itself embroiled in far-reaching and long-running litigation, leaving aside the questions of continued membership of the Eurozone.
Should Greece pay then it would be seen as a victory for the hold-out strategy, emboldening the holders of the other 19 foreign law bonds which have not been restructured. We could also see protests from those bondholders who agreed to a debt restructuring on the basis that Greece said that there was no money available to doing anything else. Such “co-operative” bondholders may explore the possibility that such misrepresentations are actionable.
Either way, holders of Greek bonds should be considering their strategies and preparing for either outcome. As John Dizard eloquently comments in today’s Financial Times (‘Holdouts get paid, the rest can pray’, Financial Times, Monday May 14 2012) “The under-lawyered should look for spiritual, not financial, comfort”.