Podcast: In The Room
Charles Dallara: "Market pressure was growing by the day"
Charles Dallara arrives at the Greek prime minister's office for a crisis meeting on 5 February 2012
One of the under-told tales of the 2010-2015 Greek sovereign debt crisis is that of the €100-billion write-off of government bonds in 2012 - still the biggest debt restructuring in history.
In his new book out today – Euroshock: How the Largest Debt Restructuring in History Helped Save Greece and Preserve the Eurozone (Rodin Books) – Charles Dallara takes us inside the rooms where he and Jean Lemierre negotiated this ground-breaking agreement on behalf of private-sector bondholders.
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This debt forgiveness by financial institutions was a critical part of the Eurozone’s €130-billion second aid package to Greece agreed in February 2012. Of the Greek government’s €356 billion in outstanding debt, €206 billion was eligible for exchange for new securities. For every €100 of bonds swapped, the owners received new 11-30-year Greek government securities with a face value of €31.5 paying out an initial coupon of 2% that doubled after 2022. As a sweetener for bondholders worried about Greece’s creditworthiness, short-term Eurozone debt and Greek bonds linked to future growth were thrown in. By accepting the swap, banks took a severe “haircut” - reducing the nominal value of their bond holdings by 53.5% and - once lost cash flows over the bonds’ lifetime were taken into account - cutting their net present value (NPV) by 75%.
With 14 years of perfect hindsight, the deal negotiated by Dallara and Lemierre via the Institute of International Finance (IIF) turned out to be a sweet one but private-sector creditors couldn’t know that at the time. Why did they do it? “We made the decision in the spring of 2011 because of growing concerns that, unless the Greek problem was addressed, the pressures would build to potentially an unmanageable level on Italy as well,” Dallara told me in an interview for my In The Room podcast series. “We felt, therefore, that this wasn't just about Greek debt and the Greek role in the Eurozone, but it was really increasingly about the ability of the Eurozone to remain intact … that, without the restructuring, those pressures were in our view becoming increasingly unmanageable”.
Negotiations were hobbled by the opposition of the European Central Bank and its outgoing president Jean-Claude Trichet to any restructuring and political reluctance to hand a clear mandate to Vittorio Grilli, who coordinated Eurozone governments’ top financial officials. “I never faulted Grilli personally for this dilemma that he faced but, structurally, it made the negotiations with him extremely circular and without forward movement for a number of months,” said Dallara. “This was, of course, a huge frustration because Europe still imagined they were already engaged in negotiating a restructuring but had never formally endorsed it at the meeting of ministers or at the heads of state. And that's because, during those first few months, Trichet and others at the ECB were still adamantly opposed. So you had a somewhat unreal - surreal, I would even say - set of circumstances where officials were meeting with the private sector; we were engaged in dialogue but they would come to the meeting and say: ‘This is not a form of restructuring and we have no mandate to engage in a form of restructuring’. Meanwhile, the market pressure was growing by the day”.
In The Room is a series of conversations with officials who played crucial roles in the history of the EU - often but not always behind the scenes.
Produced by Emin Fikić at davidstudio.