How the Greek debt reorganisation of 2012 changed ... - Allen & Overy

20 How the Greek debt reorganisation of 2012 changed the rules of sovereign insolvency – September 2012
There is no question that this announcement
was a breakthrough and an extremely important
step.
12. Political complexity
A further new factor was the extreme political
complexity of the process. This was mainly
because on the eurozone side Greece was
negotiating with 16 other governments in the
eurozone, with bit parts by non-eurozone
countries such as Britain and Sweden.
The result was that obtaining an agreement
amongst this group of creditors, who were the
ultimate paymasters, was a tortuous process. It
was rendered even more tortuous by the fact
that decisions, or the lack of them, were
coloured by the fact that policy was subjected
to the views of national voters who were not
always well-informed on the relentless logic of
bankruptcy.
Another result of the political complexity was a
comparative lack of transparency and disclosure
between creditors. A major requirement for a
successful work-out is candidness and the
sharing of information between all the parties.
Indeed, this information exchange is mentioned
in virtually all of the leading soft principles for
work-outs developed in the corporate and
public sectors.
13. Austerity measures
The disbursements of financial assistance to
Greece by the European Financial Stability
Facility were made conditional on the adoption
by the Greek government of an austerity and
reform programme.
Typically in the past, these requirements,
known as “conditionality” have been a preserve
of the IMF as a condition of the advance of
new money. Other creditors have traditionally
declined to reschedule unless the sovereign
debtor adopts the IMF requirements. In the
case of Greece, the requirements were imposed
mainly by the eurozone, together with the IMF.
The key eurozone measures can be grouped
into four main categories:
© Allen & Overy LLP 2012
– Severe cuts in public expenditure and
the setting of fiscal targets so as to end
deficits. There was to be a reduction in
pharmaceutical spending, the defence
budget, pension expenditures and
subsidies. Many public employers were
to be effectively dismissed. Certain
taxes were to be increased and special
levies were to be introduced.
– The Greek government committed to
proceed with the sale of state-owned
land, utilities, ports, airports,
entertainment and mining rights. The
privatisation programme was not
exactly a success, probably because
there were few people willing to pay for
assets in such unpredictable
circumstances and even fewer willing to
finance a purchase.
– The Greek government was required to
introduce “structural reforms” which
included the opening up of various
professions and trades to competition,
ranging from accountants to tourist
guides, a reduction of the monthly
minimum wage and the weakening of
collective wage agreements. Social
security contribution rates payable by
employers were increased. Greece was
required to implement reforms to fight
tax evasion.
– The disbursement of financial
assistance to Greece was made
conditional on the recapitalisation of
Greek banks. The finance was to be
provided by the eurozone credits via a
government fund established in Greece.
This programme ignited a passionate debate,
not only in Greece but elsewhere in the world,
as to whether policy should introduce austerity
or whether it should stimulate growth by larger
public expenditure. The debate transformed
itself into a much bigger dispute between the
economic ideologies of Keynesianism as against
Friedmanism, between the strict and the liberal,
between the ruthless and the generous, and
other grand philosophical points of view about
the nature of existence.