March 7, 2021

DealBook: A Bailout Like No Other

So, I return from vacation to find that the restructuring of Greece continues to be very much a work in progress. Indeed, it now appears much more likely that Lehman Brothers will confirm a Chapter 11 plan before the European Union will work out its similar issues regarding Greece, Portugal, Ireland, Italy and Spain.

The latest problem comes from Finland’s misunderstanding of the nature of a bailout.

As readers no doubt recall, Greece ratcheted up it its projected deficit – almost doubling it, in fact – after the financial crisis. That quickly lead to Greece’s inability to refinance its debts at an affordable rate in the markets, and several rounds of bailout financing by the European Union and International Monetary Fund began. In exchange for such financing, Greece agreed to extremely painful austerity measures.

Each successive round of financing has become increasingly unpopular in the northern, “responsible” European Union jurisdictions like the Netherlands and, most important, Germany.

In Finland, the process was further complicated by a strong showing by the anti-euro True Finns party in recent elections. Thus, the Finnish government has every reason to “be tough” with Greece, and last week the Finns and the Greeks entered into a bilateral agreement whereby Greece would escrow collateral to protect the Finnish piece of the next bailout.

The problem, of course, is that the Finns are trying to make the bailout a low-risk proposition, and if Greece were a low-risk proposition it would not need a bailout in the first place.

And if Finland gets collateral, why not everyone else too? That, of course, is impossible and leaves Greece in a position where default becomes preferable, even desirable, since it at least leaves Greece in possession of its cash.

Essentially the Finns are a holdout creditor. In the corporate context you solve this problem by filing for bankruptcy and imposing majority rule. The European Union has no such ability to compel dissenting members, and thus we are no nearer a solution to Greece and its collateral effects than we were when this all began a few years ago.

Stephen J. Lubben is the Daniel J. Moore Professor of Law at Seton Hall Law School and an expert on bankruptcy.

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