Making a Voluntary Greek Debt Exchange Work

16 Pages Posted: 4 Jan 2012 Last revised: 1 Feb 2012

See all articles by Mitu Gulati

Mitu Gulati

University of Virginia School of Law

Jeromin Zettelmeyer

Peter G. Peterson Institute for International Economics; CEPR

Multiple version iconThere are 2 versions of this paper

Date Written: January 2, 2012

Abstract

Within the next couple of months, the Greek government, is supposed to persuade private creditors holding about EUR 200bn in its bonds to voluntarily exchange their existing bonds for new bonds that pay roughly 50 percent less. This may work with large creditors whose failure to participate in a debt exchange could trigger a Greek default, but may not persuade smaller creditors, who will be told that their claims will continue to be fully serviced if they do not participate in the exchange. This paper proposes an approach to dealing with this free rider problem that exploits the fact that with some probability, the proposed exchange might be followed by an involuntary restructuring some time in the future. The idea is to design the new bonds that creditors are offered in the exchange in a way that make them much harder to restructure than the current Greek government bonds. This is easy to do because the vast majority of outstanding Greek government bonds lack standard creditor protections. Hence, creditors would be offered a bond that performs much worse than their current bond if things go according to plan, but much better if things do not. They will accept this instrument if (1) the risk of a new Greek debt restructuring in the medium term is sufficiently high; and (2) there is an expectation that the next restructuring probably will not be voluntary.

Suggested Citation

Gulati, Mitu and Zettelmeyer, Jeromin, Making a Voluntary Greek Debt Exchange Work (January 2, 2012). Economic Research Initiatives at Duke (ERID) Working Paper, Available at SSRN: https://ssrn.com/abstract=1979474 or http://dx.doi.org/10.2139/ssrn.1979474

Mitu Gulati (Contact Author)

University of Virginia School of Law ( email )

580 Massie Road
Charlottesville, VA 22903
United States

Jeromin Zettelmeyer

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

CEPR ( email )

London
United Kingdom

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