Is a voluntary Greek debt exchange possible?

The Greek austerity package was approved on Sunday February 13th, making it possible for Greece to receive the second EU-IMF bailout worth €130bn. The vote in favour of the package took place in the background of violent protests in central Athens.

As the €14.5bn Greek bond payment on March 20th draws closer, the issue of the private sector accepting a voluntary 50 per cent reduction of the face value of their bonds is becoming more and more pressing. In a recent paper, Mitu Gulati (Duke University) and Jeromin Zettelmeyer (EBRD and CEPR) look into whether a voluntary Greek debt restructuring is possible.

The authors argue that larger creditors may be more easily persuaded to accept a 50 per cent haircut than smaller creditors, given the fact that non-participation may trigger a default. Getting smaller agents to agree to the exchange however, is more problematic, as the Greek government may reassure these creditors that they will be repaid in full even if they choose not to take part in the exchange.

The paper attempts to tackle this free rider problem, assuming that with some probability, the first voluntary haircut will be followed by an involuntary debt restructuring. The authors also suggest that as part of the voluntary exchange, creditors would receive new bonds which protect creditor rights much more than current bonds do. The paper thus models a scenario in which creditors will accept the deal if they perceive a sufficiently high risk of an involuntary debt restructuring in the future.