The Greek restructuring, 2012Market knowledge

A sovereign bond exchange in which the terms of existing bonds were changed by law, and the derivative that was supposed to pay out spent weeks arguing about whether it should.

3 min read · 568 words

What happened

• Background — from 2010 Greece was funded by official lenders while its debt remained outstanding to private holders. A restructuring of the private debt was negotiated through 2011.
• February 2012 — the Greek parliament passed legislation inserting collective action clauses into existing Greek-law bonds that had been issued without them.
• March 2012 — holders were offered an exchange with a substantial reduction in the amount owed. Enough holders accepted for the newly inserted clauses to be activated, binding those who had not.
• The derivative — the industry determinations committee found that using the clauses to bind unwilling holders was a restructuring credit event, and an auction was held to settle credit default swaps.
• The two legal families — bonds issued under English law, which already contained clauses and could not be amended by Greek statute, were treated differently from the domestic-law bonds, and a number of those holders were repaid in full.

The mechanism

• Governing law is part of the instrument. Two bonds from the same borrower, with the same coupon and maturity, recovered differently because one was governed by the borrower's own law and could be amended by it, and the other was not.
• A collective action clause converts a holdout problem into a vote. Without one, every holder must agree; with one, a supermajority binds the rest. Inserting the clause retroactively is the step that made the outcome possible.
• "Voluntary" is a description of the vote, not of the alternative. The exchange was accepted by holders who could see what would happen if they did not accept.
• The credit event was a definition, not an opinion. A CDS pays on a defined list of events. Until the clause was actually used, the definitions had not been met — which is why the protection was not obviously worthless and not obviously triggered for weeks.
• Sovereign default has no bankruptcy court. There is no queue to enforce, no administrator, no assets to seize. What exists instead is contract, statute and negotiation — which is why the documents matter more here than almost anywhere else.

What it teaches

• Read the governing law before the coupon. It is on the term sheet, it is one line, and in this episode it was the line that decided the outcome.
• A hedge is a contract with definitions. Protection that pays "on default" pays on the events the definitions list. CDS and reading a term sheet are the pages on that gap.
• Sovereign risk is not just the ability to pay. It includes the ability to change the terms of the promise, which is a power no corporate borrower has.
• The same lesson as 2023's hybrid write-down. The economic claim and the legal claim are different objects, and the second one is the one that settles.

The mechanisms behind this

• Government bonds — the instrument and what backs it.
• Credit default swaps — protection defined by a list of events.
• Who gets paid — priority when there is no court to enforce it.
• The 2023 hybrid write-down — the same distinction, in a different market.