Free exchange | Rescuing sovereigns

Why it was easier then

Saving Greece will be harder than Latin American rescues in the 1980s

By A.M. | LONDON

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 membersglobal banks, insurance funds and investment managersaccount 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.

In the 1980s, the IMF generally made further lending to troubled governments conditional on private participation in debt-reduction schemes. That gave the likes of Mr Rhodes significant leverage. Banks knew that if they refused to restructure loans, governments would default without official-sector financing. The banks' loans would never be repaid. The IIF does not have the same leverage today. European governments have already committed to providing more financing to Greece, and the IMF is set to follow suit. Greece may have the funds to service the bonds of banks who refuse to participate in the IIF plan.

An important similarity with the 1980s could be the role of governments. In the 1980s the US Treasury was wary of a series of Latin American defaults, so it leaned on banks to participate in debt restructurings. Today Greek banks are certainly expected to participate in the IIF plans. French and German regulators are also thought to be putting pressure on their national banks to participate. IIF officials even concede that they shaped their proposal in discussion with euro-area governments, in the hope of increasing pressure to participate.

But regulatory pressure is not uniform across Europe. In Britain, Treasury officials say it is up to euro-area officials to make the offer attractive to banks. The government is even refusing to use its majority stake in the Royal Bank of Scotland to force its participation. Whether RBS tenders the €1 billion of Greek bonds on its trading book to the IIF offer, “is a commercial matter for the board of directors”, according to a source at UK Financial Investments, which administers the government's holdings in domestic banks.

No American bank appears on the list of institutions committed to participate in the IIF plan, despite President Obama's vocal demands for a quick solution to the Greek crisis. The IIF says that American banks' holdings of Greek bonds are so small, they were not involved in the initial planning, but that discussions are now underway. The Treasury and Federal Reserve, however, appear unlikely to lean on individual banks to participate.

Mr Rhodes' advice to the IIF is to set a deadline for participation and to push three or four big banks to take the lead in persuading others to tender their bonds. Success will ultimately depend on whether bondholders can be persuaded the plan is a once-and-for-all solution, with no further writedowns necessary. That will require the active participation of the Greek government, selling the plan to creditors alongside participating banks. So far there has been little sign of such cooperation.

*"Banker to the World", William R Rhodes

Discover more

Religious competition was to blame for Europe’s witch hunts

Many children are still persecuted as alleged witches in Africa for similar reasons

Has BRICS lived up to expectations?

The bloc of big emerging economies is surprisingly good at keeping its promises


How to interpret a market plunge

Whether a sudden sharp decline in asset prices amounts to a meaningless blip or something more depends on mass psychology