Making a Voluntary Greek Debt Exchange Work

20 Pages Posted: 20 Jan 2012

See all articles by G. Mitu Gulati

G. Mitu Gulati

Duke University School of Law

Jeromin Zettelmeyer

European Bank for Reconstruction and Development (EBRD)

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Date Written: January 2012


Within the next few 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; (2) there is an expectation that the next restructuring probably will not be voluntary.

Keywords: Debt exchange, Debt restructuring, Defaults, Eurozone crisis, Greece, Sovereign debt

JEL Classification: F34, K33

Suggested Citation

Gulati, Gaurang Mitu and Zettelmeyer, Jeromin, Making a Voluntary Greek Debt Exchange Work (January 2012). CEPR Discussion Paper No. DP8754, Available at SSRN:

Gaurang Mitu Gulati (Contact Author)

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States

Jeromin Zettelmeyer

European Bank for Reconstruction and Development (EBRD) ( email )

One Exchange Square
London, EC2A 2EH
United Kingdom

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