Nikos Koritsas, Nikos Salakas from Koutalidis Law Firm are our guests this month. Both were heavily involved in the PSI Process. They shared their first-hand experience of the PSI process, shedding light on all the challenges and consequences that Greek society continues to feel after ten years.
Could you give us a little background on the debt burden of Greece in 2012?
In 2009, the Greek financial crisis began to emerge with a lack of confidence in officially reported statistics by the Greek Authorities. After early elections in September 2009 and a change of government, the fiscal deficit reported by the Bank of Greece was revised to “12% or higher” following the announcement of the pre-election deficit in August 2009. Eurostat, working with ELSTAT (the Greek statistical authority), intervened to fix the problems revealed by the Greek system. It also caused a decline in confidence on the Greek markets.
The markets suddenly closed for one member of the Eurozone. This elite currency union was completely unprepared and caught off guard. The euro was in danger, since contagion to other eurozone countries seemed inevitable due to their exposure of the Greek sovereign debt.
The first rescue package of EUR110 billion was then offered to Greece. At the time there was no EU stability or support mechanisms. The package was given to Greece (EUR80 billions) by eurozone members and by the IMF (30 billions), who were invited to contribute their expertise in restructuring sovereign debt. The first package of aid came with a memo that outlined a list of structural reforms as a series prior actions to help Greece overcome its situation. It was clear that the solution was temporary and flawed.
In July 2011, the heads-of-state of the Eurozone and EU institutions issued a joint statement recognizing the efforts of the Greek government in stabilizing public finances and reforming the economy. The statement also expressed the intention of the eurozone to support Greece further (with the IMF), through a new programme, in order to close the estimated EUR109 billion financing gap at the time. The second program was to be funded by the newly established rescue fund for the European Financial Stabilisation Mechanism (EFSM), the European Financial Stability Fund, and the European Stability Mechanism – an EU institution created in response of the crisis.
In 2009, the Greek financial crisis began to emerge with a lack of confidence in statistics reported by the Greek Authorities.
The statement, on the other hand set the Private Sector Involvement (“PSI”) as a strict conditionality for the voluntary contribution by the private sector to this burden sharing. The majority of Greek Government Bonds held by private companies in the EU were Greek Government Bonds. A first PSI proposal was tested on them. It offered four options to exchange their GGBs for new ones with longer maturities, but with a NPV loss around 21%. It became clear that this wasn’t enough as Greece’s macroeconomic forecasts were worsening and its sovereign debt on an unsustainable trajectory.
The Eurogroup issued a comprehensive statement in October 2011 on Greece. It reiterated its support for Greece and made it clear that the PSI played a crucial role in establishing sustainability of the Greek Debt, with the goal of a debt ratio of 120% to GDP by 2020. In order to achieve this goal, the private sector has been invited to accept an exchange of GGBs with a nominal 50% discount at the start of 2012.
The Greek sovereign debt was EUR350 billion at the end of 2011. EUR205 billion were held by private investors through GGBs. The GGBs that were invited to the PSI exchange fell within this perimeter.
How did the private sector reduce the burden? What was so extraordinary about this debt exchange?
The PSI represents the largest sovereign debt restructuring to date. It was unique for many other reasons. The PSI had a number of unique features, including the creation of a steering group of creditors at the initiative of some of Europe’s largest banks and the Institute of International Finance.
In recent years, steering committees were no longer used in the restructuring of sovereign debt. However, given the size and timescale of the PSI, private creditors decided to continue with the formation of a committee. The committee was formed informally and led negotiations with Greece. At the time, Greece was experiencing a financial and political crisis unprecedented in history, with daily riots and a coalition with very limited tolerance from the electorate. It is very doubtful that the PSI could have been completed without this steering committee.
The PSI was also structured as a majority-based voluntary exchange. The vast majority of GGBs were governed by Greek law at the time, which theoretically would have allowed Greece to pass a law that imposed a haircut on creditors. This itself would expose Greece to high risks of challenges under both the Greek Constitution as well as the European Convention on Human Rights. Instead, Greece chose to conduct a consent solicitation, and retroactively introduce collective action clauses into the Greek law-governed GGBs.
These CACs treated all Greek GGBs (aggregating approximately EUR172 billion in face value) as a single series. Quorum for the acceptance of exchange was 50%, and majority 2/3. The PSI invited GGBs that were not Greek law-governed (of a face value of approximately EUR19.9billion), as well as some Greek-guaranteed bonds (of EUR6.7billion). The exchange was able to include CACs for all eligible bonds, increasing their chances of success as well as reducing legal risks.
The PSI represents the largest sovereign debt restructuring to date.
GGBs owned by the public sector have been excluded from the PSI to avoid any risk of contagion. The PSI was to be announced on 31 December 2011. To prepare for this, GGBs worth approximately EUR43 billion in face value, held by the ECB, and EUR13.5 by the national central banks, were exchanged for newly issued GGBs that had identical characteristics. The PSI did not include GGBs from the public sector.
The invitations to the PSI were announced by Greece on 24 February 2012. GGBs worth approximately EUR206 billion were invited to the exchange. GGB holders were offered these offers for each EUR1,000 of face value.
- EUR150 in EFSF 1y or 2y notes.
- EUR315 in new GGBs with 20 different maturities from 2023-2042 and a step-up coupon system;
- Notional GDP-linked Securities of EUR315;
- Short-term EFSF Notes for any interest accrued.
The new GGBs will be governed under English law and subject to English jurisdiction. They also contain provisions for negative pledges and cross defaults. The most important thing was that they were subject to a cofinancing arrangement with one of the EFSF’s facilities. This agreement provided for a pro rata redemption with the EFSF. This was equivalent to a ‘haircut of 53.5%’ on the face value and an implied NPV of 74%. Greece set a minimum threshold of 90% participation as a requirement for the exchange.
The Greek government announced on 9 March 2012 that 91% (EUR177 billion) of the GGBs governed by Greek law and exchanged with new CACs were tendered. 94% of those who tendered accepted the exchange. Nearly all GGBs with guarantees were exchanged. Initially, the acceptance of GGBs governed by foreign laws was lower. However, after two extensions this percentage has increased dramatically.
Finaly, GGBs with a face value of EUR199.2bn were part of the PSI. They were exchanged into EUR29.7bn of EFSF bills and EUR62.4bn of new GGBs. The exchange was a success, paving way for the second Greek rescue package from the official sector – this time via the EFSF instead of direct facilities provided by other EU members – and reducing risk of a Greece or eurozone collapse.
In every Greek tragedy someone must be sacrificed to achieve catharsis. In the PSI drama it was undoubtedly the Greek banks. Their regulatory capital ratios dropped below the minimum regulatory standards overnight due to an estimated EUR38 billion loss as a direct result of participating in PSI. The Hellenic Financial Stability Fund (HFSF), the investment arm of Greek government established to support the recapitalisation of the Greek banking system with EFSF funding, was forced to provide immediate assistance to prevent the Bank of Greece from revoking the licenses.
In every Greek tragedy someone has to be sacrificed in order for catharsis.
After the PSI of 2013, 2014, and 2015 (which involved further private sector participation), three rounds of recapitalisation had to be completed by Greek banks so that they could meet the regulatory requirements triggered from the PSI as well as a financial crisis-induced wave of NPEs. The sector also underwent massive consolidation, with only five banking licenses remaining: four systemic and 1 non-systemic. In fact, the Greek sovereign debt crisis wasn’t triggered by the banks, like other sovereign debt crises. Instead, it was caused by fiscal policy and overspending by the public.
What role did your team play at Koutalidis? What was your role?
The restructuring team at Koutalidis Law Firm served as Greek counsel for the Steering Committee, which was composed of private sector creditors. This role was performed both during the first attempt (but incomplete) of the PSI in July-October of 2011, and also during the actual PSI Exchange in 2012. Allen & Overy acted in the first attempt as international counsel, and White & Case joined them in the 2012 PSI. Our team’s experience and challenges were unique.
First, just being part of a team of international lawyers from top firms who worked around the clock, for five months, taught me a lot about coordination and collaboration. The complexity and challenges of PSI’s legal issues were unprecedented. The number of questions and issues were unprecedented. They ranged from conflict of laws issues such as weighing the clear system in Greece against the governing laws (English) of debt instruments like GGBs to constitutional rights questions such as whether the retroactive enactment by the Greek Constitution CACs was compliant with the Greek Constitution.
Furthermore, the exposure and experience of advising more than 40 international and Greek banks and insurance companies, through a steering committee organised by the IIF in direct negotiations with the head of government and ministers of an EU sovereign, was a once-in-a-professional-lifetime experience.
PSI has reaffirmed, above all else, that certain key principles must be applied and followed in all types of debt restructurings. This was an important lesson for our team. One of these principles is to have all the creditors (or as many of them as possible) at the same table. Intercreditors should take into account and respect the ranking of claims (such as in the co-financing agreements between PSI bondholders, and the EFSF), securing equal ranking claims for pari passu payments and pro rata payments.
Another lesson is to avoid coercive actions unless they are absolutely necessary. Even when there is a strong public interest, coercive actions in democracies can lead to high litigation risk. It is better to choose solutions that are reached by consensus. Greece made the correct choice by preferring to use a consent solicitation, and even retroactively implemented CACs that led to a restructuring on the basis of majority decision, rather than a unilateral reduction in its debt through legislative acts. This gave Greece moral high ground which no judge could ignore.
The PSI also confirmed the principle of burden-sharing in large restructurings by the private sector. After the Lehman Brothers crisis, governments were reluctant in using taxpayer money for a debt restructuring of any kind. This principle was introduced and cemented in legislation and tools for bank restructurings, resolutions and ESM DRI. In response to the Lehman Brothers Crisis. The exemption of GGBs by the ECB and the National Central Banks, as well as other Official Sector Institutions, from the PSI was also important in line with the priority given to official sector money.
The experience that our team gained through participation in PSI has been applied to virtually all debt restructurings, whether smaller or larger, in which Koutalidis Law Firm is involved after PSI.
What has changed in the last decade since the PSI was launched? What impact has it had on the Greek economy and state?
The PSI exchange was a key milestone in overcoming the Greek financial crisis. However, it has left deep scars on the Greek economy and the Greek society. It is hard to estimate the financial impact of social security funds, corporates and banks participating in the PSI. The Greek courts, European Court of Human Rights and the International Centre for Settlement of Investment Disputes, as well as other venues, were flooded with legal challenges and cases. Moral, legal, and social arguments raged for years and were never resolved.
The financial crisis, which lasted more than a year, was so severe that it threatened the existence of the Eurozone. It also triggered a political crisis in Greece for many years and led to capital restrictions being imposed on the Greek banking system. In retrospect, the sacrifices were worth it. Greece is one of the best-performing economies that have been least affected in economic downturns. This is thanks to the restructuring of its sovereign debt following the PSI, and structural changes implemented in response.
Hope that Greece and its citizens will never forget the lessons they learned from the PSI or the financial crisis in the future and will not have to repeat the same sacrifices.
Nikos Koritsas, Managing Partner
Nikos Salakas Head of Banking & Finance
The Orbit, Athens, 115 Kifissias Avenue, Greece
Tel: +30 210 3607811
E: [email protected] | [email protected]
Nikos Koritas, is the managing partner at Koutalidis Law Firm. He leads the Koutalidis Team with his internationally recognized experience in M&A and banking, capital market, finance, and restructuring. Nikos Koritsas, a leading lawyer in Greece and abroad, is recognized by IFLR as a top-tier attorney. His work focuses on complex projects and challenging undertakings.
Nikos Salkasis the head of Koutalidis Law Firm’s banking and finance department. He has extensive experience in the areas of banking, finance, restructuring, capital market, project finance, and M&A. He is also active in complex domestic and international transactions. Nikos was also Chief Legal & Governing Officer and an ExCo member of a Greek Systemic Bank.
Koutalidis Law firm, a leading Athens-based law firm. The firm was founded in 1930 and serves major Greek and International corporations, as well as important investment and commercial banks and Financial Institutions. Koutalidis’ 60-strong legal team has been recognized by many bodies, including Chambers and Partners and The Legal 500 for its excellence.