Greek deal set some ‘dangerous precedents,’ IIF says

The refusal of European central banks to accept losses on their Greek sovereign bonds and a full payout to some other investors who did not sign up to the deal set dangerous precedents for future debt restructurings, one of the deal?s negotiators said.

Private sector creditors lost about three-quarters of the value of their Greek government bonds in a deal agreed in February, as part of a restructuring of 206 billion euros ($257 billion) of the troubled euro zone country?s debt.

But the IMF, European Central Bank (ECB) and other European central banks refused to take part with bonds they held.

?They were exempt from the debt exchange and that set a very bad precedent looking forward,? said Hung Tran, deputy managing director at the Institute of International Finance (IIF), which represented private sector creditors in the deal.

?So we have an unhappy situation where you have a whole stack of official entities who all can claim preference over private sector bondholders and that is something that together we need to address,? he said. He was speaking on a panel on strengthening the framework for sovereign debt crisis resolution at the IIF banking conference in Copenhagen, Denmark.

The deal was accepted by 97 percent of private sector creditors, but a small minority held out and refused to accept it. Last month Greece made an about-turn and paid a 435 million euro bond that expired.

That undermined the principle that all creditors are treated equally, Tran said.

Greece?s restructuring was the biggest and most complex ever and was a success, but lessons can be learned to improve future restructurings, he said.

The scale of the loss — estimated at around 75 percent after taking into account the loss on future interest payments — made it appear forced, rather than voluntary.

?If it?s involving such a substantial degree of loss, then the characterization of the process as being truly voluntary is open to question,? Tran said.

Greece?s move to retroactively change the law to force holders of its domestic bonds to take losses was also criticized, and could make it harder for countries to sell bonds in the future.

?There are a number of things that happened in the Greek restructuring that create concern for sovereign borrowing going forward,? said Hans Humes, president and chief investment officer of Greylock Capital Management, who was also on the panel.

?It was very unfortunate that this happened. Going back and changing a law … really raises issues for the private sector and sovereign borrowing. The fact it was used contaminates it,? he said.

Greylock was part of the IIF?s steering committee on the Greek deal, and Humes also criticized the subordination of private bondholders to some of the official sector.

?At key moments we were left out of the discussion and we found ourselves in the aftermath subordinated. I would hope that what happened in Greece is not a template. Going forward we should discuss which institutions are senior,? he said. [Reuters]

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