Why some Greek bonds might be worth more than others

Economist
June 10, 2011

It took some time, but Germany finally seems to be addressing how, rather than if, a Greek restructuring will occur. Finance Minister Wolfgang Schäuble has written to the ECB demanding a lengthening of bond maturities as a condition of further German lending to Greece. As our leader this week argues, this will not be enough to restore Greece to solvency. If it wasn't for ECB opposition, Germany might be willing to go much further. Last year Angel Merkel called for irresponsible investors to be punished for mispricing sovereign default risk. She is not averse to imposing haircuts on bondholders. Bailing them out, after all, creates moral hazard.

If a restructuring is to take place, how could it be best designed to incentivise bondholders to monitor default risk in the future? Conventionally all bonds are treated identically in a restructuring. But what if all bonds aren’t the same? If some bonds offer stronger creditor protection against default, should they receive more lenient treatment? That is the argument made by a group of American lawyers, including Mitu Gulati, in a recent paper.

Followers of the Greek crisis may recall that Professor Gulati was the first to find that most of the debt Greece has issued since it joined the euro zone is governed by Greek law, and could therefore be restructured by legislation in the Greek parliament. This time Professor Gulati is interested in the few bond contracts that are governed by English law.

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