G. Mitu Gulati and Jeromin Zettelmeyer (Duke University – School of Law and International Monetary Fund (IMF)) have posted Making a Voluntary Greek Debt Exchange Work on SSRN. Here is the abstract:
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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 makes 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 (a return to solvency), but much better if things do not (the need for another restructuring). 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.
Recommended.