INSIGHT-Lessons for Greece from Latin American debt crises

Sun Jun 12, 2011 6:33pm EDT

* Uruguay-style debt reprofiling an alternative for Greece

* Reprofiling would lock in private sector, buy time

* Market impact seen lower than outright default (Clarifies that extension of Uruguay's debt was a bond swap, paragraph 3; adds details on ISDA position that a voluntary debt exchange would not trigger Greece's CDS contracts, paragraphs 21-22)

By Walter Brandimarte

NEW YORK, June 12 (Reuters) - European policymakers scrambling to find a solution to Greece's debt crisis should probably look to Latin America.

Uruguay, for example, was able to pull off one of the smoother sovereign debt restructurings of the past decade. For Greece, its strategy would be an alternative to both an Argentine-style default and serial government bailouts that are increasingly harder to swallow for euro zone taxpayers.

When Uruguay could no longer afford to pay its debts in 2003, it asked creditors to participate in a bond swap that would extend for five years the maturities in half of its international bonds, keeping their face value and coupon untouched.

Fearing the alternative would be far worse, 90 percent of the creditors agreed to the bond exchange, concluded in May 2003. A few months later, Uruguay was back to international capital markets. By "reprofiling" its debt, the country got the financial relief and the time it needed to implement essential reforms in its banking system.

To be sure, Greece's problems are far worse than those Uruguay had, experts on Latin American debt crises say. It is still to be seen whether the Greeks would be able to implement privatizations and painful reforms, even if five more years were given to them.

But a "soft restructuring" of Greece's debt is worth trying, especially when billions of euros of Greece's debt continue to migrate from the private sector to the books of institutions backed by richer European countries.

"If I was sitting where Ms. (Angela) Merkel is, I would say, 'This is not a game I want to play,'" said Lee Buchheit, a partner at law firm Cleary Gottlieb Steen & Hamilton, who advised Uruguay during its debt restructuring.

"I would much rather grab those private-sector creditors by the nose and hold them in until we find out what has to be done, down the road, to finally resolve this problem," he said at a recent conference organized in New York by EMTA, an industry group formerly known as the Emerging Markets Trade Association.

If it turns out that Greece eventually needs to default, he added, it is just fair for the German chancellor to want "the private sector under that sword, not the German taxpayer."

Buchheit cited the example of the Latin American debt crisis of the 1980s, which started when Mexico was unable to pay its creditors in 1982.

At the time, he recalled, U.S. bank executives flew to Washington to ask then-Treasury Secretary James Baker to extend loans to the neighboring country so that the Mexican government could pay them back. Instead, Baker forced private creditors to stay in.

"Seven years went by, during which time they (the banks) built up their loan loss reserve provisions and finally that sword did fall, said Buchheit.

The attorney helped create the Brady plan that resulted from the 1989 re-emergence of the Mexican crisis.

The plan, named after U.S. Treasury Secretary Nicholas Brady, allowed developing economies to restructure their debt by issuing new bonds, many of them backed by U.S. Treasury securities, in exchange for structural reforms.

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