Understanding the issues around sovereign default

Understanding the issues around sovereign default

As the Greek government prepares to restart talks with European authorities, University of London economist, Christina Laskaridis, identifies key issues of contention and concern about a sovereign default in Greece. Tracing a trajectory with legal, financial and political dimensions, she draws on evidence she was called to present to the Hellenic Parliament’s Committee on Public Debt.

Where does the result of the Greek referendum leave us on the issue of sovereign default and restructuring?

The aggressive stance of the European Central Bank (ECB) to not increase Emergency Lending Assistance (ELA) at a crucial time for the Greek economy, triggered the decision to close the banks and impose capital controls. This stance was furthered by the ECB decision of 7 July 2015 to increase the haircut on that collateral Greek banks provide in return for receiving ELA from the Eurosystem—it would be a challenge to interpret this as anything but a signal of the negative stance the authorities took to the outcome of the referendum.

What are the immediate implications of a sovereign default?

Greece’s public debt has multiple structures and falls under different legal jurisdictions, containing different cross-default and cross-acceleration clauses, creating an intricate web of clauses that could trigger demands for repayments of several lenders simultaneously. Key structures relevant to sovereign default include:

  • the 2012 Master Financial Assistance Facility Agreement between Greece and the European Financial Stability Facility (EFSF)
  • bonds held by the ECB totalling €6.7bn, due in July and August 2015
  • Greece’s debt to commercial lenders, which fall due from 10 July 2015 onwards and are varied in their composition

In theory, failing to pay the IMF could create entitlement for some of Greece’s other creditors to declare a default, and activate acceleration clauses—ie demand an immediate repayment of other loans. Under MFAFA (Greece’s second loan agreement) failure to pay the IMF at the end of June 2015 led to the EFSF (Greece’s largest creditor) to opt for a reservation of rights on EFSF loans to Greece, meaning the EFSF will sit tight until developments evolve. However, the real issue now is whether the ECB will step into its role and provide the needed liquidity for the Greek banking sector, or alternatively precipitate a dramatic worsening of the crisis.

What are the key steps and who are the key players in a sovereign bond restructuring?

Sovereign bonds make up a small portion of Greece public debt. As of 30 April 2015, in billion, and as a portion of Greek public debt:

  • bonds—€39.4bn or 12.6%
  • bo

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About the author:

Neeta has been working as a paralegal in Banking and Insolvency for the past 4 and a half years.

She started her legal career at Allen & Overy in 2008 in the midst of the global financial crisis and the collapse of Lehmans where she gained most of her experience.

Neeta also did a short stint in litigation at the Revenue and Customs Prosecutions Office. Neeta graduated with a 2:1 honours degree from University of London, Queen Mary College and went on to obtain a distinction from the College of Law in the Legal Practice Course. She moved to Lexis®PSL in April 2013.