By Alexander Apostolides on January 31, 2013

Excellent Paper and Workshop "Eurozone Debt Crisis:The options now, with Special Reference to Cyprus"

Back in December I was lucky enough to meet Mitu Gulati, Professor of Law, Duke University, in Geneva. We both quickly concurred that the fiscal needs of Cyprus was in the agenda of all in Europe and beyond, and we decided to have a workshop about it in Nicosia. Lee C Buchheit, partner at Cleary, Gottlieb, Steen & Hamilton LLP, by far the most experienced sovereign debt reconstruction lawyer agreed to attend, and we decided to add a view from the ground by asking Fiona Mullen of Sapienta Economics to review the situation from Cyprus.

Lawyers are used to problem-solving and need to give their clients options: economists far too often retreat in the theoretical field when faced with a real world dilemma. Originally the plan was to present to excellent evaluation of the Eurozone debt crisis which was written by Lee C Buchheit and Mitu Gulati ("The Eurozone   debt crisis- the options now"  which in very simple language puts forth the possibilities of how the overall Eurozone debt issue will play out.

Yet thanks to Mitu Gulati's and Lee C Buchheit's incredible work-rate, they managed to make a working paper on the issue that was most on the mind of those who are considering restructuring of Cypriot debt: the issue of holdouts.

Mitu Gulati and Lee C Buchheit are intensely aware that in practical terms the Greek restructuring had a limited number of holdouts due to the fact that 93% of the Greek debt was under domestic law, and hence legal instruments could be retroactively integrated in the law to force the holdouts to settle. Yet  Cyprus, as well as other EU countries,  would face a significant holdout problem if they ever restructure their debt, even by mildly extending the maturity of the loan. This is because about half of the Cypriot debt was issued under English law, and because of that the  investors have the ability to to holdout and demand to be paid in full and on time.

"The Problem of Holdout Creditors in Eurozone Debt Restructurings" spells out the problem; the authors offer an alteration of the Europe-wide ESM treaty that would reduce the bargaining power of the creditors, which has been noted by the Financial Times as a possible future issue to be addressed by the Eurozone member countries.   My personal thought is that the Cypriot presidency, which took charge in the latter half of 2012 when the ESM was still not fully fleshed out, missed a historic opportunity to attach such a condition to the treaty. This would have helped Cyprus but also all other  Eurozone nations struggling with their debt. Rather than chase the issues that were important for the Cypriot presidency in 2012, we chased the issues other presidencies seemed to have placed on the wayside. This is a minor error by the Republic when faced by another, more basic error: the fact that Cypriot government debt was issued without hiring lawyers to represent the republic. The  decision of the Republic of Cyprus not to hire lawyers when issuing debt led to very inflexible contracts: in order to save some thousands of Euros in lawyer fees, the Republic now faces  investor intransigence and the possibility of paying out billions of Euros that it can not afford.

The Workshop "Eurozone Debt Crisis:The options now, with Special Reference to Cyprus" took place on the 30th of January at the European University Cyprus and it was an unqualified success. Both English speaking and Greek speaking Cypriot media took up the concerns expressed by the three panellists (and echoed by myself, who acted as the moderator).

First up was Fiona Mullen of Sapianta Economics who in her presentation (you can access it here) outlined the current issues of Cyprus:
1) The republic is 2 to 3 bn Euro away from being able to call its debt "sustainable" and hence qualify for IMF assistance
2) There  is a need to repay bondholders 1.4 bn euros in the 3rd of June, and the Republic does not have it.

Fiona argues that a mix and match of policies could bring the debt down to the IMF number of 120% debt to GDP ratio that is aimed by the IMF, and considers the idea of a very modest restructuring of the debt by extending the debt maturity by five years as one of the best options to alleviate the austerity of the adjustment period. Fiona is too polite to point out that that 2/3 Bn missing is because Mr Stavrakis (the then finance minister) decided to borrow short term rather than more expensive long term borrowing (that would have forced him to launch austerity or taxation increases). As a result over 34% of National debt is expiring in 2013 due to Mr Stavrakis' bet that the economic situation of Cyprus would have changed by the better this year. His lost bet doomed Cyprus: the amount we need to pay to bondholders that hold maturing debt is now the difference between being accepted as having a sustainable debt level by the IMF or not receiving a bailout. When the government rails against privatisation of semi-government companies, it is very ironic as its actions back in the period 2008-2010 ensured that some privatisation will be necessary.

Next, Mitu Gulati and Lee Buchheit divided their time on two issues:
1) The possibility of extending debt maturity in Cyprus: They pointed out that contrary to most shallow analysis, the Cypriot foreign debt contracts do have enough legal basis for Cyprus to go to court and expect a possibly favourable result (see the presentation here).
2) General Eurozone issues: Lee C Buchheit pointed out that the issue of Cyprus and the decisions if the EU taxpayer or the investor or depositors pay the price is now out of Cypriot hands.
The Eurozone has to decide not only in how to help countries which need bailouts, but also whether they want the debt liability to be the sole concern of the European taxpayer. Lee C Buchheit pointed out that out of the first Greek Bailout, approximately 75% of the bailout amount went to investors who were paid out in full, and the resulting political  backlash led to a very severe haircutting of the remaining private investors. He suggests a more outright approach  from the beginning as to who is going to bear the costs should be addressed at an Eurozone-wide level.

The discussion largely centred around Cyprus and what it could do. The general agreement seemed to be that if required, the pushing back of maturity of the existing debt seemed like the most sensible option. This re-profiling of the debt, rather than a haircut of the interest or of the principal could solve many issues:

  • The  reduction of the net present value of government debt owned by Cypriot bank would be relatively small, reducing the contagion to the local banking system. 
  • Thanks to the way contracts were written, even in the English law bonds there is enough of a difference of interpretation to ensure that the Republic has a chance in surviving litigation, thus changing the incentives of holdouts to accept the extension of the maturity.  
  • But the June deadline is very tight: in order to do the above the new president has to run and start the procedure of debt re-profiling, or at least convince the Eurozone partners to provide the amount needed to pay the June investors in full.
 I would like to thank the Speakers (Lee Buchheit, Fiona Mullen and Mitu Gulati), and especially Lee Buchheit and Mitu Gulati who took time out of  their busy schedule to fly to Cyprus, and to all who attended. The active participation of the audience made this a very lively event. Now we all await the new government of Cyprus in February, and how it will react in front of the tough options that it faces.

Alexander Apostolides
Lecturer, Economic History
European University Cyprus

By Alexander Apostolides on January 22, 2013

The excellent ideas of social enterprise: Nick Moon, Kickstart, and the 2013 Cypriot Kapuscinski lecture

Development does not have just one narrative, but many. Mr. Moon knows the narrative of aid as a project that ends and people leave the infrastructure to rot away, or of large scale capital infrastructure. With his fellow entrepreneurial colleagues he chooses a better route--> use the profit motive to ensure development success.

He sells water pumps and irrigation systems for African farmers that are efficient to use with just manpower. Any profits go to the development of biological fertilizers suitable for the fertile and wet conditions of most of Sub-Saharan Africa. The most exciting speech I head for a while.

As soon as I have time I will email Mr. Moon: his social enterprise (Kickstart) is doing currently more to help poor farmers rise out of poverty than ambitious energy generation plants on Lake Kivu run by multinationals.
I want to thank CYINDEP for originizing such an enjoyable night. You can see the site of the event here.

I want to thank

By Alexander Apostolides on January 12, 2013

Upcoming events 16th Jan, 21st Jan, 23rd Jan, 30th Jan. NOTE the change of time and venue: CYPRUS DEBT HAIRCUT EVENT (30th Jan) NOW at 11:00 Auditorium D,

Upcoming events 16th Jan, 21st Jan, 23rd Jan, 30th Jan. NOTE the change of time and venue: CYPRUS DEBT HAIRCUT EVENT (30th Jan) NOW at 11:00 Auditorium D,

Dear all,
I hope you are well. We are very excited in the Department of Accounting, Economics and Finance, of the European University Cyprus can announce a whole host of events to take place from now until the end of January, for which our department is actively involved. 

1)      The Annual Kapuscinski development lectures by CyIndep (Cyprus Island-wide NGO Development Platform)  will be by NICK MOON on: “Reducing poverty in Africa through business” on the  16th of January (Wednesday) 18:30 at the Home for Cooperation (Ledra Palace)

Nick Moon, award-winning supporter of African entrepreneurship will speak about market based approaches to poverty reduction, food security, economic empowerment and climate change.  I was the speaker in this event last year with the minister for Development cooperation of Holland and Ms Youli Taki. Although not actively involved, I find the topic brave and challenging our perceptions: i love it! 

2)      Presentation of Book: "Development Theory and development in practice: A Dialogue". By Stefano Moncada (UOM) and Alexander Apostolides (EUC) 21st January Room 203, European University Cyprus, 18:00 

This book was supported by the NGO support centre, Cyprus, under the auspices of the EuropeAid project “Knowledge Makes Change” which aimed to develop capacity and raise awareness in Cyprus about the Millennium Development Goals. The project and its effective management by the NGO support centre has changed communication between academia and NGOs in Cyprus for the better, and placed development cooperation as an issue in the public arena of Cyprus for the first time.  

The book is a handbook for NGOs and others interested in development to show how economic theory and development assistance interact in practise. It argues that economic theory without the input of development practitioners can lead to wayward development policies. The best breakthroughs in the progress of development theory arose through understanding of what the development practitioners were facing on the ground, and we hope the book will begin greater dialogue between NGOs in development and development theorists in academic institutions.

3)      Presentation of policy papers: "The Millennium Development Goals and the role of CyprusAid". 23rd January, Wednesday, 9:00 The Classic Hotel 

Several Policy proposals will be presented. The discussion will be opened by Ms. Nadia Karayianni, member of the NGO SC Board of Directors and member of CYINDEP, Cyprus Island-wide NGO Development Platform, Board. including the policy paper by Alexander Apostolides and Costas Apostolides on how "“How Can Co-Sponsorship Provide aid Effectiveness and Foster Awareness in Cyprus?”. 

4)      “The Eurozone debt crisis: the options now, with special reference to Cyprus”. Wednesday the 30th of January at 11:00-13:00 at the European University Cyprus, Auditorium D.
The Department of Accounting, Finance and Economics of the European University Cyprus would like to invite you to the workshop of the very current issue of a possible haircut of existing national debt. The workshop will  will last about an hour followed by a question and answer session.

The speakers will be:
Dr. Mitu Gulati, Professor of Law , Duke University. Dr. Gulati was instrumental in suggesting the feasibility of a reduction of Greek debt through swaps, suggesting that collective action clauses allowed enough negotiation room for debtors to come to a deal with their creditors. His Joint paper with Lee C. Buchheit in 2010 proposed a way for Greece to force investors who wanted to reject a deal to nevertheless suffer the same loss as those who agreed.

Lee C. Buchheit, Partner at Cleary Gottlieb Steen & Hamilton LLP and Visiting Professorial Fellow in the Centre for Commercial Law Studies at the University of London. He was an instrumental part of the team of lawyers who managed the new deals between investors and the Greek state and has been vital in providing leverage for indebted countries to compel holdout creditors into deals favorable for the debtor.

Fiona Mullen, Director of Sapienta Economics. Fiona Mullen and Sapienta Economics has been providing detailed reports on the economy of Cyprus for the past decade, and has extensively written about the existing Cypriot debt and the possible repercussions of its renegotiation

Alexander Apostolides