Principle write-downs in PSI
Yes, the headline’s a pun. A very bad one.
The following aren’t particularly new criticisms of the legacy set by Greece’s debt restructuring (least not on FT Alphaville)…
This is more about who’s making them. The April policy letter of the IIF has looked at lessons from the bond swap. The IIF is the bank body that was right in the middle of the PSI and did the donkey’s work of getting investors to agree, en masse, to the biggest sovereign debt restructuring in history.
So, from Charles Dallara (excuse the length):
Subordination of private investor claims: The carving out from the debt exchange of the Greek bond holdings by the ECB, the Euro Area central banks, and the European Investment Bank has resulted in a de facto subordination of private investor claims relative to claims by official sector bodies. Notwithstanding the rationale for such action, questions arise about the implications this or similar actions in the future might have on the perceived credit risk of sovereign debt, the relative ranking of private investor claims, and the incentives of private investors to increase their exposure to sovereign debt. It has also raised questions about the efficacy of market supporting interventions by the ECB or the European Financial Stability Facility (EFSF)/ESM.
Use of Collective Action Clauses (CACs): The Greek debt crisis has demonstrated the useful role that appropriate CACs could play in facilitating sovereign debt crisis resolution. This is in fact recognized by Euro Area countries, as the ESM envisages the introduction of CACs in all future issues of Euro Area sovereign debt. We urge other major countries to consider adopting a similar policy in their sovereign debt issuance, as this would enhance the functioning of sovereign debt markets. However, the retroactive introduction of CACs just prior to the debt exchange in the Greek government bonds issued under Greek law, notwithstanding the private creditor eventual consent to activate these CACs and thus facilitate the success of the debt exchange, has raised a number of concerns and questions. Such retroactive actions could encourage investors to prefer international law bonds instead of domestic law bonds issued by weak countries to minimize sovereign risk.Opaque setting of macroeconomic framework for the debt exchange negotiations: The rather opaque and non-consultative way the Greek medium-term growth projections and reform objectives were prepared and frequently changed by the official sector, including in the debt sustainability analysis, did not facilitate an open and productive dialogue with private creditors. This raises questions about the proper role of official entities, including the IMF, in the sovereign debt restructuring process, and the best ways to encourage a more open and timely dialogue and greater data and policy transparency with private creditors.In this context, we are pleased to announce the formation of a joint public-private sector committee, endorsed by the Co-Chairs of the Group of Trustees of the Principles, to explore these lessons and we look forward to constructive discussions with the public sector on how to enhance existing practices in sovereign debt crisis prevention and resolution.And in case you scoff at the forming of a committee — remember this is how practice in sovereign restructuring gets changed, given the lack of “hard” law in the area. It will be interesting to see what happens.That shot about “opaque and non-consultative” forecasts is quite a large (and more than justified) bomb lobbed at the IMF and the eurozone creditors, by the way.As to the point about collective action clauses, the IIF is continuing a long-term trend here towards making CACs ubiquitous in sovereign debt, going right back to the turn of the century. When trouble hits, they’re useful.There’s that ambiguity over retroactive CACs in what the IIF says… they’re not nice in how they let sovereigns alter the rules, but, as it turned out in Greece, effective. We still wonder about the ESM treatment of CACs in eurozone sovereign debt though, given the IIF’s concerns. Bonds have to bear CACs, but those bonds will remain governed under domestic law, as with most of these sovereigns’ debt stocks, and thus (in theory) mutable at any time.Interesting bind there, no?