From Pigs to Hogs

In March 2012, Greece conducted one of the biggest and most brutal sovereign debt restructurings ever, asking holders of Greek government bonds to take net present value haircuts of near 80 percent. Greece forced acquiescence to its terms from a large number of its bonds by using a variety of legal strong-arm tactics. With the vast majority of Greek bonds, the tactics worked. There were, however, thirty-six bonds guaranteed by the Greek state, which, because of the weakness of the underlying companies, were effectively obligations of the Greek state. Yet, on these thirty-six bonds, even though Greece desperately needed every euro of respite it could get, no restructuring was even attempted. Why not? The answer we received was that the guarantees escaped the restructuring because their contractual provisions made them much harder to restructure than the ordinary Greek government bonds. Assuming this contract-based claim to be true, the foregoing, in combination with the Euro area crisis of 2010-2014 throws up an opportunity to test the extent to which markets price legal differences in bond contract terms. We report evidence that the markets did price in at least some of the advantage that guaranteed bonds had over ordinary sovereign bonds in the months immediately prior to the March 2012 restructuring