July 29, 2011
A book doing the rounds in Brussels by the veteran American financier Bill Rhodes, describes how the Citibank executive persuaded the big banks of his day to restructure loans to Latin American governments from the 1980s onwards. In the most recent, and famous, example — a 2003 offer to extend the maturity of Uruguayan bonds by five years — he achieved a 93% participation rate.
Today the International Institute of Finance (IIF) is trying something similar for Greece. IIF members—global banks, insurance funds and investment managers—account for nearly all privately held Greek bonds. The IIF wants its members to extend the maturity of their Greek bonds maturing before 2020, while also reducing the overall amount owed by the Greek government. Mr Rhodes says the IIF should aim to exceed its 90% target for participation, if markets are to be convinced the plan can stabilise Greek debt. Is this likely?
One key difference between the 1980s and today is the variety of bondholders. In the 1980s syndicates of banks financed governments directly though loans. Every bank had a strong interest in ensuring that governments avoided default. Today’s Greek bondholders include hedge funds, mutual funds and even private individuals, many of whom will have purchased bonds on the secondary market at below-par prices. The diversity of bondholders, and their varying levels of tolerance of a default, makes coordination complicated.