Venezuela seems to be close to a debt debacle and apparently no discussions, not even a hint of plan in works has surfaced. Should Venezuela take a hint from the works of the Greek saga ?

From “Greek Debt Exchange: An Autopsy” from EBRD and CEPR, University of Munich, CESifo, and Duke University authors Jeromin Zettelmeyer, Christoph Trebesch, Mitu Gulati : The Greeks were smart to apply new laws where “votes of 50% of face value and a consent threshold of two-thirds of the face-value of bonds, applied across the totality of all Greek law sovereign bonds outstanding rather than bond-by-bond” were required for the exchange. This paper discusses that despite the large variation in the present value haircuts across the bondholders, you had few “holdouts” with 90% of creditors participation.

Why did so many holders of debt take that deal ? There were three reasons, as numbered by Zettemeyer et. al.

-the 15% EFSF  (now ESM) “as good as cash”;

-the new bonds were issued under English law, and included standard creditor protections such as pari passu, negative pledge, and cross-default clauses. Greek-law sovereign bonds contained almost none of these protections;

-the new bonds were issued under a “co-financing agreement” that created an “exact symmetry between Greece’s debt service to the new bondholders and its debt service to the EFSF.” Of course, the largest creditor to Greece was the EU – both through the EFSF, and through the “Greek Loan Facility” (GLF)”

Since 2012, Greece defaulted again. In 2015, Greece defaulted on IMF loans, the largest default in IMF’s history.

The authors say that Greece’s plan would have been better if:

1. Rather than conducting the buyback as a Dutch auction at a market price, Greece would have conducted at a pre-set price and,

2. Greece would have done a full buyback from the outset.

Of course, Venezuela is not in default -yet. But it is coming closer to it than ever.