Governing law and the Greek debt restructuring

10 December 2012

(Extract from page 67 of BIS Quarterly Review, December 2012)

The importance of governing law as a way to distinguish international from domestic bonds was illustrated by the Greek government's restructuring in March 2012 of its outstanding bonds. Whereas private sector holders of bonds governed by Greek law agreed to a substantial reduction in the value of their claims, holders of a bond governed by English law were repaid in full upon maturity in May 2012.

A key component of Greece's economic reform programme is a reduction in the country's debt-to-GDP ratio. In February 2012, the Greek government launched an offer to exchange €206 billion of bonds held by private sector investors for new bonds with a face value of about €100 billion. When the offer closed, bondholders had tendered almost 97% of the amount eligible to be exchanged.

While the terms of the exchange offer were substantially identical for all bondholders, the participation rate was higher among holders of Greek-law bonds than among holders of foreign-law bonds. Indeed, for holders of Greeklaw bonds, one of the attractions of the exchange was that the new bonds would be governed by English law. The Greek government facilitated the restructuring of the outstanding Greek-law bonds by passing new legislation in February 2012 that introduced collective action clauses (CACs) into Greek-law bonds that did not originally include such clauses. The clauses allowed the government to change the bonds' terms if two thirds of the bondholders participating in the exchange agreed. In the event, bondholders representing about 85% of the outstanding amount accepted the exchange, and their decision to participate in the exchange offer then permitted its terms to become binding on all holders of Greek-law bonds.

The English-law bonds issued or guaranteed by the Greek government included CACs on initial issuance. However, whereas the threshold to activate the CACs introduced into the Greek-law bonds was based on an aggregate overall acceptance rate, that in the English-law bonds was for an individual bond. Consequently, creditors who opted not to participate in the exchange offer could more easily block a restructuring of an individual Englishlaw bond than of the Greek-law bonds as a whole (Zettelmeyer and Gulati (2012)). Foreign-law bonds with a face value of €6 billion did not participate in the exchange, and in May 2012 the Greek government opted to repay in full €435 million of maturing English-law bonds. The next foreign-law bond to mature is a CHF 650 million issue governed by Swiss law due in July 2013.