BERLIN, March 19 One of the world's leading
experts on debt restructurings has proposed extending the
maturities of Cypriot sovereign bonds and giving uninsured
depositors in its banks certificates of deposit (CDs) as a
solution to the Mediterranean island's crisis.
In a paper entitled "Walking Back from Cyprus", Lee Buchheit
of New York law firm Cleary Gottlieb Steen & Hamilton and his
frequent collaborator, Mitu Gulati of Duke Law School, say
European governments "trespassed on consecrated ground" with
their plan to impose a levy on insured depositors in Cyprus.
They sketch out an alternative which would protect savers
with deposits under 100,000 euros ($130,000) and grant those
above that level 5-10 year interest-bearing bank CDs
corresponding to the amount of their savings in excess of the
In addition, the maturities of all sovereign bonds would be
extended by a fixed number of years, for example five.
"By our reckoning, this would reduce the total amount of the
required official sector bailout funding during a three-year
program period by about 6.6 billion euros," the paper says.
Euro zone finance ministers reversed course and urged the
Cypriot government on Monday to exempt small savers from a
planned levy on deposits agreed at a meeting in Brussels in the
early hours of Saturday.
But the Cypriot parliament was still expected to reject the
10 billion euro bailout deal in a scheduled vote on Tuesday,
which may be pushed back if failure looks inevitable. Cyprus
risks default and a banking collapse if it is unable to find a
way out of the impasse.
That is why the Buchheit and Gulati proposal, a draft of
which was published on the website of the Social Science
Research Network on Monday, may be relevant. Buchheit has
crafted or advised on debt restructurings for the past 30 years,
including those in Uruguay, Greece and Iraq.
The authors argue that the CDs would lock in funding for
Cypriot banks for many years, while the bond extension would
avoid the need for those maturities to be repaid out of official
sector bailout funds.
They concede that their solution could raise a number of
objections - among them that Cypriot banks would still need to
be recapitalised and that the banks themselves own most of the
European governments and the International Monetary Fund
(IMF) might also object to a solution which may not address
their concerns about debt sustainability in Cyprus.
But the authors present their proposal as the least painful
and risky of a limited number of unattractive options.