How Did the 2012 PSI Alleviate Greece’s Debt Crisis?

How Did the 2012 PSI Alleviate Greece’s Debt Crisis?

In 2012, the Greek economy was in dire straits. With a growing fiscal debt crisis that threatened to strike other EU members and the currency itself, a rescue operation was mounted that involved hundreds of billions of euros’ worth of financial aid and an unprecedented private sector involvement (‘PSI’) to enable Greece to restructure its economy.

This month we have the pleasure of hearing from Nikos Koritsas and Nikos Salakas at Koutalidis Law Firm, both of whom were deeply involved in the PSI process. Sharing first-hand knowledge of the proceedings, they shed light on the many challenges involved in each step and the consequences for Greek society that continue to be felt after ten years.

To begin with, could you please give us some background information into the state of Greece’s debt burden in 2012?

The Greek financial crisis started to surface in 2009 with a loss of confidence in the officially reported statistical data by the Greek Authorities. Following early elections and a change in the government in October of 2009, the officially reported fiscal deficit was revised through a Statement by the Governor of the Bank Greece from 6%, which was the deficit communicated in August of 2009 pre-election, to “12% of the GDP or higher”. This revealed the weaknesses of the Greek statistical system and triggered an intervention of Eurostat in order to identify and fix said weaknesses, in collaboration with ELSTAT, the Greek statistical authority. Nevertheless, it also led to a loss of confidence of the markets in Greece.

Suddenly, the markets closed for a member of the eurozone, an economic elite currency union which was totally unprepared for such an occurrence and was caught by surprise. The euro was at risk, as contagion for other eurozone members seemed inevitable given their exposure to the Greek sovereign debt.

This led to first rescue package for Greece of €110 billion. As no stability or support mechanism existed in the EU at the time, the package was made available to Greece by certain eurozone members (€80 billion) and the IMF (€30 billion), which was invited to support the process by contributing its expertise in sovereign debt restructuring. The first rescue package came with a memorandum setting out a long list of structural changes as prior actions, aimed at helping Greece to overcome the situation. Nonetheless, it was obvious that it was a temporary and imperfect solution.

In July of 2011, the heads of state of the euro area and EU institutions published a statement acknowledging the efforts made by the Greek government to stabilise public finances and reform the economy. Moreover, the statement made express the intention of eurozone members to further support Greece (with the IMF) through a new program in order to cover the financing gap, estimated at the time at €109 billion. This second program would be made available through the then newly-established rescue fund of the European Financial Stabilisation Mechanism, the European Financial Stability Fund and the European Stability Mechanism, an EU treaty institution established in the meantime in response to the crisis.

The Greek financial crisis started to surface in 2009 with a loss of confidence in the officially reported statistical data by the Greek Authorities.

On the other hand, the statement set the Private Sector Involvement (‘PSI’) as a strict conditionality to the voluntary contribution of the private sector in this burden-sharing. As EU banks and insurance companies were the majority holdings of the Greek Government Bonds (‘GGBs’) in the private sector, a first proposal for the PSI was tested with them, offering four options for exchanging their GGBs with new ones that had longer maturities and implied an NPV loss of approximately 21%. Soon, however, it became apparent that this was not enough, as the macroeconomic projections had further deteriorated for Greece and its sovereign debt was on an unsustainable path.

In October of 2011, the Eurogroup came out with a very comprehensive statement on Greece, stating again its support to Greece but making also clear that the PSI had a vital role in establishing the sustainability of the Greek debt, targeting a 120% debt to GDP in 2020. To achieve this, the private sector was invited to accept a voluntary GGBs exchange with a nominal discount of 50% at the beginning of 2012.

By the end of 2011, the Greek sovereign debt exceeded €350 billion, €205 billion of which were held by the private sector through GGBs. This was the perimeter of the eligible GGBs invited in the PSI exchange.

How did the private sector come to alleviate the burden, and how was this done? What made this debt exchange transaction extraordinary?

The PSI is the largest restructuring of sovereign debt to date. But it was not only this that made it unique. One of the most important features of the PSI was the constitution of a steering committee of creditors following the initiative of the Institute of International Finance (‘IIF’) and some of the largest European banks.

The forming of steering committees of creditors was a practice that had been abandoned for several years in sovereign debt restructurings, but given the size of the PSI and the timeframe for its consummation, the private sector creditors decided to move forward with a committee. This committee, which was informally constituted, led the negotiations with Greece, which was undergoing an unprecedented financial and political crisis with riots in the streets on a daily basis and a coalition government with very narrow margins of tolerance by the electorate. Had this steering committee not existed, it is highly arguable whether the PSI would have been completed.

Further, the PSI was structured as a voluntary and majority-based exchange. Although the vast majority of the GGBs was governed at the time by Greek law, which theoretically allowed Greece to simply pass a law imposing a haircut on its creditors, which itself would have exposed Greece to high risk of challenges both under the Greek Constitution and the European Convention on Human Rights, Greece opted for a consent solicitation and the retroactive introduction of collective action clauses in the Greek law-governed GGBs (‘CACs’).

Under these CACs, all Greek law-governed GGBs (aggregating to approximately €172 billion of face value) were treated as one series, whilst quorum for accepting the exchange was set at 50% and majority at 2/3 of those tendering their GGBs. Non-Greek law-governed GGBs (of approximately €19.9 billion face value) and some bonds guaranteed by Greece (of approximately €6.7billion) that were invited in the PSI included their own CACs. This meant that the whole of the range of eligible bonds that were invited in the exchange included CACs, increasing the chances of success and reducing the legal risk for challenges.

The PSI is the largest restructuring of sovereign debt to date.

To avoid contagion risk, GGBs held by the public sector were excluded from the PSI. 31 December 2011 was set as the cut-off date for GGBs eligible for the PSI and so, shortly before its announcement, GGBs of approximately €43 billion face value held by the ECB and €13.5 billion held by national central banks were exchanged with newly issued GGBs with identical characteristics. In this way, public sector GGBs were not invited in the PSI.

On 24 February 2012, Greece announced the invitations for the PSI. Approximately €206 billion worth of GGBs were invited in the exchange, whilst GGBs holders were offered the following for every €1,000 face value of existing GGBs:

  • €150 of EFSF 1y and 2y notes (cash equivalent);
  • €315 of new GGBs, including 20 different series maturing from 2023 to 2042 with a step-up coupon structure;
  • €315 of notional of GDP-linked securities; and
  • short-term EFSF notes for any accrued interest.

The new GGBs would be governed by English law, subject to the jurisdiction of English courts and contain negative pledge and cross-default provisions. Most importantly, however, they were made subject to a co-financing agreement with one of the EFSF facilities, which provided for a pro-rata redemption with the EFSF. This amounted to a face value ‘haircut’ of 53.5% and an implied NPV haircut of 74%. A 90% minimum participation threshold was set by Greece as a condition for the exchange.

On 9 March 2012, the Greek government announced that 91% of the €177 billion Greek law-governed GGBs with the new CACs had been tendered, with 94% of those tendered accepting the exchange. Almost all guaranteed GGBs were exchanged. The acceptance of foreign law-governed GGBs was initially lower, but following two extensions the percentage increased significantly.

Finally, GGBs of €199.2 billion face value participated in the PSI and were exchanged for €29.7 billion of EFSF notes and €62.4 billion of new GGBs. The exchange was successful, paving the way for the second rescue package by the official sector for Greece – this time through the EFSF rather than direct facilities of other EU members – and reducing the risk of a collapse of Greece and the eurozone as a whole.

As is the case in every Greek tragedy, however, someone had to be sacrificed for the catharsis to occur. Undoubtedly, in the PSI drama, these were the Greek banks. With an immediate loss estimated to €38 billion as a result of their participation in the PSI, their regulatory capital ratios fell below minimum regulatory levels overnight. The Hellenic Financial Stability Fund, the investment arm of the Greek government, established in the meantime for supporting the recapitalisation and consolidation of the Greek banking sector with EFSF funds, had to step in and provide immediate support in order to avoid the banking licenses’ immediate revocation by the Bank of Greece (as at the time the ECB had not taken over the regulatory supervision of systemic banks).

As is the case in every Greek tragedy, someone had to be sacrificed for the catharsis to occur.

Three rounds of recapitalisation of Greek banks had to be completed following the PSI in 2013, 2014 and 2015 (involving further private sector involvement) so that the Greek banks could address the regulatory requirements triggered by the PSI, as well as a wave of NPEs and NPLs that was caused by financial crisis. Further, the sector underwent a massive consolidation with just five banking licenses surviving: four systemic and one non-systemic. The very fact that the Greek sovereign debt crisis was not triggered by the banking sector, as was the case in other sovereign debt crises, but rather by unfortunate fiscal policy and public overspending, made the Greek banking drama even bigger.

How were your team at Koutalidis involved in this? What were your respective roles?

The restructuring team of Koutalidis Law Firm acted as the Greek counsel to the Steering Committee of private sector creditors, both in the first (but unfinished) attempt for the PSI between July and October of 2011 but also in the actual PSI exchange in 2012. Allen & Overy acted as international counsel in the first attempt, joined by White & Case in the 2012 PSI. The experience gained by our team and the challenges faced were unique.

First of all, the very participation in a legal team composed of leading practitioners from two of the top-tier international law firms, working around the clock for almost five months, was an intensive course on coordination and collaboration. Further, the complexity and challenge of the legal issues of PSI was unprecedented. Ranging from conflicts of laws questions, such as the significance of the so-called ‘local law advantage’ (namely the power of a sovereign to unilaterally amend debt governed by its laws by enacting amendments) and the choice of the clearing system (in Greece) weighted against the governing law (English) for debt instruments such as the GGBs, to constitutional rights issues, such as the compliance with the Greek Constitution of the retroactive enactment of CACs, the number and complexity of the questions and issues raised was unique.

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.

Above all, however, the PSI reaffirmed that there are some key principles that must be followed and applied in all kinds of debt restructurings. That was a significant lesson learned for our team. Having all (or as many as possible) of the creditors round the same negotiating table is one of those principles. The ranking of claims should be very carefully considered and respected through intercreditors (such as the co-financing agreement between PSI bondholders and the EFSF), securing for equally ranking claims pari passu and pro rata payments (a matter which resulted in litigation for several years in Argentina’s debt restructuring where this principle was challenged – see NML Capital Ltd v Republic of Argentina).

Avoiding coercive action, unless absolutely necessary, is another lesson. Coercive action in democracies, even where intense public interest may be served, triggers high litigation risks. Consensual solutions should be preferred. Greece made the right choice in preferring a consent solicitation and an even retroactively enacted set of CACs, leading to a restructuring based on majority decision to a unilateral reduction of its debt imposed through legislative acts, giving Greece a moral high ground, which no judge can ignore.

Burden-sharing by the private sector in large restructurings is also a principle which was confirmed through the PSI. In the aftermath and experience of the Lehman Brothers financial crisis, governments were reluctant to use taxpayers’ money in a debt restructuring even of a sovereign without first seeing the private sector sharing part of the financial burden. This is a principle introduced and cemented also in the legislation and tools developed for bank restructurings and resolutions (SRMR and BRRD, ESM DRI etc.) in response to the Lehman Brothers crisis. In line with this, the effective priority of official sector money through the exemption of the GGBs held by the ECB, the National Central Banks and other Official Sector Institutions from the PSI, was also significant.

This unprecedented experience gained by our team through its participation in the PSI was applied in virtually all of the smaller or larger debt restructurings in which Koutalidis Law Firm was involved post-PSI.

How have things progressed now that a decade has passed since the PSI? What has the impact been for the Greek state and economy?

The PSI was one of the key milestones in mastering the Greek financial crisis, but it left deep scars in the Greek economy and society. The financial impact on social security funds, banks and corporates from their participation in the PSI exchange was perhaps unmeasurable. A wave of legal cases and challenges made their way through the Greek courts, the European Court of Human Rights, the International Centre for Settlement of Investment Disputes and any other venue lawyers could think of. Moral, legal and social arguments were ignited and lasted for years before they were settled.

A financial crisis of such size and strength, which lasted for more than a decade, threatened the unity – if not the very existence – of the eurozone, triggered a deep political crisis for several years in Greece and caused the imposition of capital movement restrictions in the Greek banking system for almost four years, required huge sacrifices. With hindsight, these were worthwhile. Greece, leveraging on the reprofiling of its sovereign debt that followed the PSI and the structural changes introduced in response to the crisis, is now one of the strongest-performing economies in the world that has been least affected by economic downturns.

Let’s hope that in the years to come, Greece and its people will not forget the lessons learned from the PSI and the financial crisis and never again will have to make similar sacrifices.


Nikos Koritsas, Managing Partner

Nikos Salakas, Head of Banking & Finance

Koutalidis Law Firm

The Orbit, 115 Kifissias Ave, Athens 115 24, Greece

Tel: +30 210 3607811

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Nikos Koritsas is managing partner of Koutalidis Law Firm. Drawing upon his extensive and internationally acclaimed experience in M&A, banking, capital markets, finance and restructuring, he leads the Koutalidis team with excellence-driven client solutions at the forefront of his strategy. Nikos Koritsas is recognised as a top-tier lawyer by IFLR, and his work focuses on challenging undertakings and complicated projects both in the Greek and the international corporate market.

Nikos Salakas is a partner at Koutalidis Law Firm and head of its banking and finance practice. With extensive experience in banking, finance and restructuring, capital markets, project finance and M&A, he is particularly active in complicated domestic and international transactions and has repeatedly been acknowledged by international legal directories for his successful track record, including as a Market Leader by IFLR. Nikos has also served as Chief Legal & Governance Officer and ExCo Member of a Greek systemic bank.

Koutalidis Law Firm is a leading law firm based in Athens, Greece. Founded in 1930, the firm serves major Greek and international corporations as well as significant investment and commercial banks and financial institutions. Koutalidis’s 60-strong team of legal experts have been recognised by numerous bodies for their excellence, including Chambers and Partners and The Legal 500.

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