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Making a Voluntary Greek Debt Exchange Work

Author

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  • Gulati, Mitu
  • Zettelmeyer, Jeromin

Abstract

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.

Suggested Citation

  • Gulati, Mitu & Zettelmeyer, Jeromin, 2012. "Making a Voluntary Greek Debt Exchange Work," CEPR Discussion Papers 8754, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:8754
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    References listed on IDEAS

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    1. Joshua Aizenman & Kenneth M. Kletzer & Brian Pinto, 2005. "Sargent-Wallace meets Krugman-Flood-Garber, or: why sovereign debt swaps do not avert macroeconomic crises," Economic Journal, Royal Economic Society, vol. 115(503), pages 343-367, April.
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    Cited by:

    1. Chamon, Marcos & Schumacher, Julian & Trebesch, Christoph, 2018. "Foreign-law bonds: Can they reduce sovereign borrowing costs?," Journal of International Economics, Elsevier, vol. 114(C), pages 164-179.

    More about this item

    Keywords

    Debt exchange; Debt restructuring; Defaults; Eurozone crisis; Greece; Sovereign debt;

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • K33 - Law and Economics - - Other Substantive Areas of Law - - - International Law

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