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Monday, July 4, 2011

Ekathemerini - Selective Default

What about bond holders who are not party to the voluntary agreement which is supposed to be reached between the EU and banks, insurance companies, etc.?

Imagine a Family Office which holds a 1 million EUR Greek bond maturing in 2012. Imagine also that this Family Office had other things to worry about than this 1 million bond and had ignored the news reports about the "voluntary agreement". Finally, imagine that this Family Office has excellent legal advice.

Come 2012 and the maturity date of the bond, the Family Office will expect 1 million EUR to arrive in their bank account; in cash and not in new bonds! If not, it will sue for payment under the law stipulated in the bond issue. Unless the EU abolishes the State of Law by then, the Family Office will win (or rather: an official Event of Default will be declared affecting all other Greek bonds).

As a result, the presently discussed "French Plan" can only work if it allows unequal treatment of bond holders. The bond holders who are party to the agreement will have to live by its terms; the other bond holders will receive cash as though nothing had happened.

One of the pillars in any debt restructuring, voluntary or not, is the equal treatment of all creditors ("consortium approval"). Why in the Greek case the parties to the agreements would accept that other creditors remain outside the agreement and receive preferential treatment has not yet been explained. One can reasonably question that it can be explained credibly.

While EU-elites discuss intellectual proposals in their ivory towers, Greece could use the time to develop her own practical alternatives. If Greece now gets the next instalment and a second bail-out plan, the government will be “financed” for the next year or even more. So whatever the government does with regard to debt between now and then can take place in a completely relaxed environment; no pressure whatsoever; totally "voluntary".

Greece should use this window of opportunity to work out – behind closed doors and with the best experts available – a foreign debt rescheduling proposal which moves loan maturities and interest payments as far into the future as possible (but no haircut!). And, at the same time, Greece should work out – again behind closed doors and with the best experts available – an economic development plan which has a chance of working.

And then, one day in the near future, Greece surprises the EU-elites, Central Banks and creditors that she has developed plans and a proposal which is "so good than it cannot be refused". Greece should emphasize that this proposal is the only chance for the country to regain a realistic perspective for the future and that she expects the EU to help realize that chance. And if the EU does not "play ball", then Greece should start thinking about leaving the EU/Euro and finding new friends in Asia.

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