Eurozone debt: Keeping it together

As the sovereign debt crisis threatens to bring the euro to its knees, a group of lawyers has been working behind the scenes to keep the cogs turning. LB finds out what happened backstage.

Lee Buchheit has faced a frantic few months. He has been advising the Greek government on how to sort out its massive debt problem. This has seen him shuttle between meetings across Europe for the past five months and spend more time in hotel rooms in Paris, Brussels, Berlin and London than in his hometown of New York.

When LB interviews Buchheit, a corporate partner at Cleary Gottlieb Steen & Hamilton, on 2 November he has just flown back to New York from the eurozone summit in Brussels. He attended the conference with the Greek delegation that included former Greek Prime Minister George Papandreou and Minister of Finance Evangelos Venizelos.

Cleary has been advising the Greek government since the July 2011 bailout. But things are not going as expected. On the morning of the November interview, Papandreou announced he was calling a referendum on whether Greece should accept the package agreed at the summit. It came just five days after the massive ‘comprehensive’ deal to shore up the euro was announced, sending the markets into turmoil and putting everything in flux again. ‘I’m having déjà vu all over again today,’ laughs Buchheit. ‘Last year I represented Iceland on the Icesave dispute, and we negotiated that deal only to find out that the president wanted a referendum.’ Buchheit has the calm confidence of someone who has seen it all before.

‘You shuttle from one meeting to the next, going round and round, but each time you get a little bit closer to the final outcome.’ – Andrew Shutter, Cleary Gottlieb

He is part of a team that has been on some of the biggest sovereign debt restructurings of the past 25 years. From advising on the reorganisation of Mexico’s debt in the 1980s, to acting on the Korean and Indonesian debt restructurings in the 1990s, right up to the Argentinean default in 2002. ‘I don’t know how many I’ve done over the years – everything from Mexico City to Moscow to Montevideo,’ says Buchheit in his languid tone. There are some countries that view a sovereign debt restructuring as terribly shameful. And there are other countries that have done it so often you think it’s a national pastime – they do it every few years to have some fun.’

The Greek crisis is, of course, just the latest in an extraordinary 18 months that has seen a handful of countries in the eurozone lurch toward the brink of bankruptcy, as the future of the euro looks increasingly shaky. The International Monetary Fund (IMF) has become a regular fixture at meetings in Brussels, and a €1trn bailout fund has been doling out money to Ireland, Portugal and Greece. A handful of lawyers have taken crucial roles on addressing the eurozone crisis. Allen & Overy (A&O), Clifford Chance (CC) and Cleary have been behind the scenes, hovering in corridors and sitting quietly on conference calls trying to hammer out the technical issues to get each bailout through and, ultimately, to keep the euro ticking along.

 

Athens is burning

Greece, with a population of almost 11 million people, has amassed a debt of around $1.2trn, about a quarter of a million dollars for every working Greek. By the summer of 2011, the EU’s loans to Greece so far were not enough to plug the gaping hole in the country’s finances. Buchheit and the Cleary team have worked with the Greeks through an extraordinary time. Riots on the streets of Athens and mass general strikes by public sector workers, a further Greek bailout and a shock referendum call are all events that impacted the course the team was to follow. The bailout that was proposed in July is now a distant memory, but the October eurozone summit is still fresh in Buchheit’s memory. ‘It was quite a long slog,’ he says.

The Cleary team was moving back and forth between meetings at the Brussels summit into the wee hours of the morning, desperately trying to negotiate a deal. It was 4am in the Justus Lipsius building, which houses the Council of the European Union, when after nearly ten hours of arduous bargaining, the eurozone’s leaders reached the long-promised package to ‘save the euro’. Fellow Cleary finance partner Andrew Shutter was at the summit and recalls the slow pace of negotiations. ‘It was a lot of to-ing and fro-ing between the various stakeholders,’ he says. ‘The eurozone governments on the one hand and the representatives of the private creditors on the other. You shuttle from one meeting to the next, going round and round, but each time you get a little bit closer to the final outcome.’

Buchheit is clearly as bemused by the latest Greek news as everyone else. Months of work leading up to the eurozone summit in October still hang in the balance.

Under the terms of the deal, private banks holding Greek debt will accept a write-off of 50% of their returns, which would cut the nation’s debt load to 120% of its GDP in 2020. Europe’s bailout fund, the European Financial Stability Facility (EFSF) is also under the spotlight. As part of the deal, its firepower was raised from €440bn to €1trn (not quite the €2trn ‘big bazooka’ that some were hoping for). It has started courting Chinese investors in the hope that they will pour some of their spare cash into the fund.

Buchheit is clearly as bemused by the latest Greek news as everyone else. Months of work leading up to the eurozone summit in October still hang in the balance. But the Cleary team came to the party relatively late. The firm was first appointed by the Greeks in July this year, after the most recent bailout – gazumping A&O off the deal in the process. The second Greek bailout, amounting to €160bn which went ahead in July, saw London-based A&O finance partner Yannis Manuelides, a Greek national and English-qualified solicitor, advising the Greek government along with special global counsel Philip Wood and general securities partner Matthew Hartley.

A&O had been assiduously courting the Greek government for 18 months to win the work, as one observer rather pointedly noted: ‘A&O were basically rounding up anyone who had a drop of Greek blood in them and shipping them out to Greece to try and get this work.’ But in a surprise decision just four days after their July bailout by the EFSF, the Greeks decided to bring in Cleary to represent them instead. As a consolation prize, the Greeks asked A&O to switch to representing the banks on the plan. BNP Paribas, HSBC and Deutsche Bank were overseeing the voluntary bond exchange and debt buyback programme. Cleary effectively usurped A&O for the work, with sources in the Magic Circle firm saying that A&O was disappointed but not particularly surprised that Cleary was instructed.

The ties between the Greek government and Cleary had been strengthening for quite some time. Greece had appointed international financial adviser and asset manager Lazard, who had hired ex-Cleary managing partner Mark Walker as a senior adviser in its sovereign advisory group just months before. Buchheit had followed the Greek debt crisis closely in the past few years, and had written two papers on how to cure the Greek crisis. The most recent, written in April this year was the ominously titled ‘Greek Debt – The Endgame Scenarios’.

‘Our normal role is to represent the government,’ says Buchheit of the appointment. ‘And us representing the sovereign is more the natural order of things.’ The first order of business for Buchheit was to make sure that the details of the July deal were followed through. But events made that impossible.

 

Hope fund

Eighteen months ago, Greece was hitting the headlines for the first time. ‘Greek debt crisis spreading “like Ebola”’ and ‘Europe must act now, OECD warns,’ said The Telegraph newspaper. ‘Three years to save the Euro,’ said The Economist. It was against this backdrop that Jonathan Lewis, a soft-spoken Welshman working in CC’s Paris office, received a call about doing some work for the European Commission. ‘Some of the partners in the Paris office said, “We’ve potentially got something interesting here. You’re an English law banking lawyer, come see if this is something we can take on”,’ says Lewis.

One of the people that Lewis talked to was of counsel Michel Petite. Petite was the former director-general of legal services at the European Commission before joining CC in 2008. This connection, along with Lewis’ knowledge of the inner workings of central banks (gained from a stint at the Bank of England earlier in his career), meant that, after a brief tender process, CC was brought on board. The firm initially advised the Commission on the structuring of a €80bn loan agreement in April 2010 to bail out Greece. Little did they know that the loan agreement would turn out to be just the start of 18 months of increasingly complex work.

‘It all spiralled from there,’ recalls Lewis, who is obviously slightly puzzled to find himself near the centre of one of the biggest crises facing the world economy since the collapse of Lehman Brothers. When LB catches up with Lewis he has just finished a presentation on the sovereign debt crisis at CC’s Canary Wharf headquarters. ‘We planned it quite some time back,’ he says. ‘I thought sovereign debt was probably going to be seen as a really academic and obscure topic, of interest just to specialists.’ Unfortunately events have proved him wrong.

After the initial loan agreement, for which the firm was paid e110,000 in fees, the Commission decided that instead of providing money directly to stricken governments, it wanted to create a temporary bailout fund that would raise money directly from the private sector. ‘Things evolved from an initial discussion on whether certain ideas could be turned into something that would see the light of day,’ says Lewis. ‘We happened to be there for another reason, and then this whole thing evolved. We had the right sort of English and Luxembourg law expertise readily at hand.’

‘Some countries view a sovereign debt restructuring as shameful; others have done its so often it’s a national pastime.’ – Lee Buchheit, Cleary Gottlieb

The Commission decided to follow a model that the French government had used during its banking crisis in 2008 for the new vehicle, the Société de Financement de l’Economie Française. The temporary bailout fund would issue government guaranteed bonds on the capital markets, and the money raised would then be lent on to governments that were in crisis. Conveniently for CC, the Commission decided to structure the whole deal under English law (deemed neutral, as the UK is not a part of the eurozone). Once the firm got the nod from the Commission in May 2010, they spent an intense month thrashing out the structure of the new bailout fund that would be the EFSF. It is now a firm fixture on the European landscape and has bailed out Ireland, Portugal and Greece.

The new EFSF structure had to be signed off by all the members of the eurozone. The complex and technical issues were thrown open to the views of diplomats, finance ministries and lawyers. Dirk Bliesener, a capital markets partner at Hengeler Mueller in Frankfurt, which advised Germany’s Federal Ministry of Finance, recalls a hard month of negotiations. ‘There was a lot of pressure on the part of the German government to get it right. It’s an extremely political venture with 16 countries’ representatives all sitting around microphones or telephones talking about very technical issues,’ says Bliesener. ‘The drafters were under extreme time pressure.’ Having politicians and diplomats present on what was already a complex capital markets deal certainly seems to have made the whole process that much more challenging. ‘It’s difficult, because it’s not just a negotiation among legal experts, but a complex diplomatic and political debate with a lot of public attention,’ says Bliesener. ‘It makes it very complicated for everyone involved.’

‘We work on a very technical level,’ explains Lewis. ‘When you are a commercial lawyer you are purely dealing with financial risk. But here, you are trying to deal with political elements and public policy, not purely who gets paid first or who is more senior in the ranking.’ By 7 June 2010 all sides had agreed on the structure of the new €440bn bailout fund. With it, the key mechanism for bailing out ailing European nations, including Ireland, Portugal and Greece, was born. ‘The original hope had been that that vehicle would never get activated,’ says Lewis. ‘Unfortunately instead of the crisis going away, it continued.’

 

A test case

The EFSF was put to the test later that year. As 2010 drew to a close, it was becoming clear that Ireland was not going to be able to pay its bills. By November 2010 an €85bn package of loans was agreed by the Irish government, the EFSF and the IMF. Under the deal, the EFSF would deliver €5bn, while loans from the IMF and bilateral loans from the UK, Denmark and Sweden made up the rest.

By the time a bailout was on the table, Irish firm Arthur Cox had been working with the Irish Department of Finance for over two years. The firm’s slick managing partner Pádraig Ó Ríordáin led the majority of the work. His team in the Dublin office had advised on the recapitalisation of the banking system and the creation of the National Asset Management Authority, or the ‘bad bank’. In the context of the massive structural changes that Ó Ríordáin was advising on, the bailout seemed fairly straightforward.

‘We were the first law firm ever to deal with the EFSF,’ says Ó Ríordáin. ‘It was a very pressured time. In terms of the mechanics of the refinancing itself, it’s a lot less exciting than it sounds. The core part is, what are the steps the country commits to, to address the financial crisis? The pivotal part is the memorandum of understanding between the government, the IMF, the EU and the European Central Bank. This defines the steps that will be taken to address the structural and fiscal challenges necessary to restore the financial position of the state.’

The IMF used its own in-house lawyers due to the cookie-cutter nature of the work; one partner interviewed for this piece said that the work was effectively a form-filling exercise.

‘Ireland has proven to be a laboratory and testing ground for the policy measures required to restore an economy.’ – Padraig O Riordain, Arthur Cox

CC continued to advise the EFSF on the fund’s first  €5bn bond issuance. The first bond was kept deliberately small to make it seem more successful, resulting in a heavily over-subscribed issuance.

A&O advised HM Treasury on the UK’s £3.2bn bilateral loan agreement to Ireland. ‘There are obviously big differences in dealing with a sovereign, the main one being the absence of an insolvency regime,’ says Michael Duncan, lead partner on the matter and chairman of the firm’s global banking practice.

A major issue was sorting out which creditors would have seniority in the deal. Traditionally, the IMF always gets paid off first, but with EFSF that became less clear.

‘If the IMF enjoys priority, perhaps inevitably other creditors try to argue they should be placed in a similar position,’ says Duncan.

But once those technical issues were ironed out (with the EFSF subordinated to the IMF) the Irish deal ultimately proved to be a testing ground for the bailouts still to come in Portugal in April 2011 and, subsequently, Greece in July.

‘Ireland was the first country that had an EFSF refinancing,’ says Ó Ríordáin. ‘So when the Portuguese transaction happened, we received calls from a range of stakeholders in the Portuguese economy to understand what to expect, and how the mechanics and substance would work. In some ways, Ireland has proven to be a laboratory and testing ground for the policy measures required to restore an economy to health.’

 

Murky waters

As LB went to press, events across Europe were moving at a rapid rate. After a ferocious reaction from Europe and the rest of the world to Papandreou’s decision to hold a referendum, the Greek Prime Minister abandoned plans for a vote and stepped down. A new national unity government is currently being formed, with Lucas Papademos appointed as the new Prime Minister. Elsewhere in Europe, Italy is being dragged deeper into crisis as the cost of borrowing for the Italian government soars and concern that Italian debt levels are unsustainable grows. And on 13 November, Italian Prime Minister Silvio Berlusconi resigned after 17 years in politics. He has subsequently been replaced by technocrat Mario Monti. The EFSF has also taken a kicking: the bailout fund suffered a failed auction in early November, cutting its latest bond issue from €5bn to €3bn because of a lack of demand. The bailout fund’s bonds fell amid fears that the capital markets were no longer willing to lend money to the EFSF.

For lawyers like Lewis and Buchheit, this means there will be plenty more late nights and flights across Europe in the coming months. Buchheit looks forward to it. ‘I enjoy it immensely,’ he says. ‘Everyone’s politics and culture are different. That’s part of the fun, frankly, of doing sovereign debt restructuring. Getting an assessment on where a country stands on its geo-political leverage and adapting what you are doing to the culture.’

 

Timeline

• April 2010

European Commission loans Greece €80bn.

• June 2010

A new European bailout fund, the European Financial Stability Facility (EFSF), is created. It is backed up by €440bn worth of guarantees from European governments.

• December 2010

Irish bailout. The International Monetary Fund (IMF), EFSF and a number of European countries lend the Irish government a total of €85bn. It is the first time the EFSF is put to the test.

• May 2011

Portugal bailout. The EFSF and IMF provide loans worth €52bn to the struggling Portuguese government. July 2011 Eurozone crisis summit held in Brussels. EFSF’s firepower is enlarged from €440bn to €780bn. A second Greek bailout is agreed, and as part of the deal Greece receives another €159bn in loans from the EFSF, the IMF and the private sector.

• October 2011

Eurozone crisis summit in Brussels. The EFSF’s funds are increased to €1trn from €780bn. Privately held Greek debt gets a 50% ‘haircut’ and a further €130bn package of loans to Greece is agreed.

• November 2011

Greek Prime Minister George Papandreou calls a referendum on the latest bailout agreement. The referendum is quickly abandoned and Papandreou steps down.

 

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