On July 5, the Greeks voted emphatically against their creditors’ proposals. Earlier that week, the IMF released a report in which it recommended a comprehensive recover plan that included a debt relief or a debt moratorium for at least 20 years.
WHO IS AT RISK?
Previous bail out plans have mainly served to reduce the exposure of private creditors, i.e mostly the French and German banks. Nevertheless, some of the current debt is still in the hands of private creditors, as shown here.
Foreign banks have only been marginally exposed to Greek debt since 2012 (around €3.3 billion). It is assumed they are no longer taking any positions in the Greek debt save for risk management purposes. As a result, most market activity involves selling positions in Greek debt or risk reduction by amending any financing documents to which Greek debtors were parties. Those private investors which are still exposed to Greek credit are mostly bond holders.
According to a recent IMF Press statement, even if Greece does not repay its loans, IMF members will not see losses, “IMF member countries’ claims on the IMF being fully secure”. As a result, the UK is theoretically not exposed through the IMF to a Greek default.
The situation is different for Eurozone countries, because they have significant exposure to Greek debt as the ECB currently holds 65% of it. This chart shows a breakdown by country.
The principal countries exposed to Greek debt are Germany, France, Italy, Spain and the Netherlands. However, when adjusted relative to GDP, the story is slightly different. Each of the Eurozone countries’ contribution to Greek debt represents between 2.5 and 3% of their GDP with Slovenia, Malta and Spain being the most exposed. Therefore, many Eurozone countries cannot afford a significant write off of their Greek debt, as it would equate to a contraction of their GDP at a time when the Eurozone growth rate is around 1%.
WHAT TO DO?
If a Grexit happens whilst a creditor is still exposed to the Eurozone, hedging would be the obvious solution. Although a few banks did offer “Xexit swaps”, which provided currency protection for parties who had immovable exposures (eg real estate) in countries vulnerable to leaving the Euro zone (country “X”), this market has largely evaporated especially in relation to Greece. None of the credit default swap, the credit insurance or the distressed debt trading markets offer any capacity for Greek risk.
If a Grexit happens whilst a party is exposed to Greek credit, careful drafting of financing documents should seek to include some of the following:
- Do not have Greek law govern the contract,
- Do not submit to the jurisdiction of the Greek courts. Instead, submit to the exclusive jurisdiction of another court with no Greek nexus. Ensure that a Greek counterparty expressly does this for the benefit of the other party,
- If payment is in Euros, make sure that it cites the relevant EU treaty as the definition of the Euro and not, for example, the lawful currency for the time being of Greece,
- Make sure that good discharge of payment obligations can only be effected by tendering Euros and that the place of performance of payment obligations and, to the extent practical, performance obligations, is outside Greece,
- Make sure that a change of the currency of account and legal tender in Greece is carved out of any force majeure and frustration provisions in the contract,
- If there is an illegality clause in the contract, word it so that if performance by a Greek counterparty would be illegal under the laws of Greece, it undertakes to procure performance by a third party where such performance would not be illegal,
- Add a currency indemnity,