Greek debt better shielded from vultures than Argentina's

LONDON (Reuters) - Greece might be spared the decade-long legal battles Argentina faced if it ends up restructuring its debt, although lawyers say vulture funds might still hold Athens to ransom.

The structure of Athens’ debt and the use of contract clauses that make it easier for countries to impose losses on bondholders should protect the country from litigious “hold-out” investors, although experts warn they are not fool-proof.

Greece, the first developed country to default on an International Monetary Fund loan, has seen the value of its bonds collapse on fears it is headed for a repeat of 2012, when it wrote down its debt. Greeks will vote on Sunday in a referendum that could ultimately see it leave the euro zone.

But brokers say there are no signs yet of distressed debt investors that prey on bankrupt countries - and have hauled the likes of Argentina through the courts - hovering over Greece.

“There is a small risk that there could be holdout law suits, but nothing like Argentina,” said Starla Griffin of Slaney Advisors, a lawyer and member of the Expert Group on Sovereign Debt Restructuring sponsored by the United Nations.

Argentina, whose debt was not protected by such clauses when it defaulted in 2002, is still in a legal battle with holdouts, including Elliott Management’s affiliate, NML Capital Ltd, and Aurelius Capital Management.


Investors aiming to stay out of any further Greek debt writedown and get more of their money back would first have to thwart collective action clauses (CACs). Those clauses are written into about 33 billion euros of Greek bonds issued in 2012 as part of the restructuring and into around 6 billion euros of 2017 and 2019 bonds issued last year.

The former - handed to investors in a process called Private Sector Involvement in exchange for older bonds - are even better protected, because they are treated as one series.

For a debt restructuring to be enforced on all those bonds, investors holding at least two-thirds of the outstanding bonds need to vote, and 75 percent of those voting need to back it.

That means holdouts would have to build a stake of some 5.5 billion euros across all the bonds, rather than a smaller stake in only one of them, to have a chance of success.

“For a significant amendment to the terms of the PSI notes, the quorum will be two-thirds, but with 25 percent you can block any proposal of this type, given that they require 75 per cent approval to pass,” said Arjun Muddu, an associate at Linklaters, who acted for banks mediating the 2012 restructuring.

Japonica Partners says it is one of the largest holders of Greek government debt, and launched a tender to buy up to 4 billion euros of these bonds in 2013. If Greek bond prices fall further, the firm might be able to build a blocking stake. Reuters has not been able to confirm Japonica holdings of Greek debt in conversations with traders and other investors or on bond databases.

The two Greek bonds issued in 2014 also have CACs, but they are different. They allow for a vote on each bond, meaning investors need less money to build a blocking stake.

After a U.S. court ruling that forced Argentina into another default last year, the IMF called for CACs to require only a single vote across all affected bonds rather than multiple votes on each one. A single vote would make it easier to impose a writedown.

That approach has been endorsed in Europe by the International Capital Markets Association, but it may have come too late for Greece.

“The two-limbed requirement makes life for holdouts more difficult, but CACs are not watertight and in theory holdouts can still block a restructuring with a large and diverse majority,” said Dania Thomas, business law lecturer at Glasgow University.

There is precedent in Greece for holdouts. Athens still has around 4 billion euros of old, unrestructured bonds, but has so far honored payments on such debt and avoided court action.


But even if investors are pushed into future haircuts, the legal battles may not be over.

Christian Leathley, an international arbitration lawyer at Herbert Smith Freehills, said that if investors could not get a blocking stake in any future restructuring, they might still be able to pursue a claim against the sovereign under an applicable bilateral investment treaty.

Herbert Smith Freehills pursued bondholder claims arising out of Argentina in U.S. court enforcement actions.

“Even though under the bond you were basically strong-armed into accepting this arrangement, that might not necessarily preclude you from bringing a claim under a treaty,” said Leathley.

“No matter what the best intention is ... there could be some quite lengthy litigation that follows through these international arbitral tribunals.”

Greece has signed around 40 such treaties with other countries, including Germany, according to the United Nations.