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

26 How the Greek debt reorganisation of 2012 changed the rules of sovereign insolvency – September 2012
2. Priority creditors In the case of
corporations, there is a long list of
preferred unsecured creditors, which
can sometimes include depositors at
banks, insureds with insurance
companies, the taxman, employees for
their remuneration and benefits, postcommencement
new money and postcommencement
expenses. These are
tracked in the case of sovereign
bankruptcies by, for example, the
preferred status of the IMF and other
multilaterals, the priority of sovereign
deposit insurance schemes (which take
over any depositor preference by
subrogation) and, in the case of Greece,
an enormous priority for last resort new
money, plus central bank money.
3. Pari passu creditors These are
typically banks, bondholders and
suppliers. Suppliers are not a large
claimant in sovereign bankruptcies. In
corporate bankruptcies, banks and
bondholders may convert into equity.
In both corporate and sovereign
bankruptcies, banks or bondholders or
both are typically by far the largest class
of creditors. They expect to rank
equally between themselves.
4. Subordinated creditors These are
creditors who agree to be subordinated
in their original documents. Typically
there are no subordinated creditors in
formal terms in the case of sovereigns,
but the same effect can be achieved by
postponing the debt for, say, ten or 15
years.
5. Equity If a corporate is insolvent, then
the equity is not paid. The shares may
be diluted by conversion of senior pari
passu debt into equity, thereby wiping
out the existing equity who would in
any case receive nothing. There is no
equity in the case of sovereign states
but effectively an exchange into notes
of anything over, say, 20 years, is
effectively equity in priority terms
because it is similar to a perpetual claim.
© Allen & Overy LLP 2012
It does not really make sense to talk
about priority of maturities over seven
to ten years which is why the table
given above in relation to Greece is
somewhat ambiguous.
6. Expropriated claimants In corporate
bankruptcies, these are claimants whose
claims are not recognised or are
otherwise demoted to such a degree as
to be worthless. An example is the
compulsory conversion of foreign
exchange debt into local currency at the
commencement of the corporate
bankruptcy – a near universal rule. If
the local currency is depreciating, as it
often is, the effect is that foreign
currency creditors are not paid. Other
expropriated claimants are those for
foreign taxes or penalties. These
expropriated claimants are often not
exactly replicated in sovereign
bankruptcies but you can get a similar
effect.
What therefore is surprising is how closely the
corporate model, with all of its sophisticated
refinements, is replicated in very crude and
primitive terms in the case of a sovereign
bankruptcy. However the corporate model has
the certainty of the priorities being clear and
binding. The issue in the Greek case was that
the priorities were not certain and priorities
were unexpectedly asserted by the public sector
leading to market fears as to what the priority
ladder would be in the future, including
whether the ECB and NCBs would assert
priority for all of their holdings.
Greek priority of public sector
finance: the pros and cons
Everybody has their own reasons as to why
they should enjoy a priority and one cannot go
into the rationale of each creditor listed above
in the ladder.
In the case of Greece, unquestionably the most
unexpected outcome was the enormous priority
of the debt of the public sector. It is worth
discussing the pros and cons.