Should Portugal Follow Greece’s Lead on Debt Swap?

A law professor at Duke University suggests that now that Greece has completed its so-called private-sector investor (PSI) debt swap, Portugal should seriously consider following a similar course of action on its medium-term bonds. European Central Bank president Mario Draghi has already said that no other eurozone member, including Portugal, needs to follow Greece’s footsteps.

However, in an article in the International Financing Review, Professor Mitu Galati argues that

The lesson of Greece is that the rights of foreign law bonds should be respected but you have more leeway to impose terms on instruments issued under domestic law.

Most Greek bonds were issued under domestic Greek law, as are the sovereign bonds of nearly all other nations. This makes it easier to make bond holders an offer they can’t refuse than making a similar deal for bonds offered under foreign law. Says Galati, “I think the Greek actions will have put the fear of God into anyone holding eurozone domestic law bonds, if not particularly Portugal.”

Galati suggests that Portugal offer to buy back existing 3- and 5-year debt at a premium to the price the bonds are trading at, currently about 75% of par. A haircut of, say, 55%, is better than that, and Portugal gets to issue new, longer term debt and ease its current debt repayment obligations. Stay tuned.