Corporate Framework for Sovereign Debt

On Friday, a four-month extension of the Greece bailout plan was agreed upon, narrowly avoiding the otherwise imminent threat of default. The way I understand the situation is as follows: the financial crisis of 2009 left the Greek government with an insubordinate amount of debt, forcing them to seek loans from other European countries. The loans carried provisions and regulations as to how Greece would solve its economic problems, with the idea that a stimulated Greek economy would generate the revenue needed to repay the loans. The terms of those initial loans were due to expire, and Greece is no closer to being able to repay them as their economy has made little to no progress. Elections in Greece yielded a political party determined to renegotiate the terms of its obligations to its creditors, which brings us to where we are today. There are many problems that need to be addressed, but in my opinion, the most significant is that there is no precedent or framework in place on how to deal with sovereign debt. If Greece decides that it can’t pay back the debt, what happens? What legal entity exists to force Greece to repay the debt, or even follow the reforms outlined in the terms of the loan?

Another interesting topic that stems from the same fundamental problem is what role does democracy play? Greece’s voters elected a government to take some course of action, whether it is right or wrong is irrelevant, that’s just how democracy works. However, how can the government follow through on those actions when its policies are at the mercy of its creditors? On one side of the argument, there is the view that “If Europe says no to Greek voters’ demand for a change of course, it is saying that democracy is of no importance, at least when it comes to economics.” The opposing view states: “It is unrealistic for Greece to claim that its voters trump voters in other countries. Indeed, inside a currency union where no member is fully sovereign, it is inherently impossible for any newly elected government to claim that their new electoral mandate trumps everything else.”

In the corporate world, this problem is somewhat analogous to the distinction between equity and debt. Shareholders are the voters and get to decide the policies of the company, when everything is running smoothly that is. But in bankruptcy, it comes down to seniority- with senior debt holders coming first and equity shareholders coming last. There are certainly differences between corporations and governments, but I don’t see why the same principles shouldn’t hold. In both cases, the shareholders/voters elected a management team that was ineffective, ultimately leading to the distressed situation in the first place. They also effectively agreed to the terms of the debt by voting in a management team that accepted them.

 

One thought on “Corporate Framework for Sovereign Debt

  1. Paul Irwin

    Great topic choice for a blog. You make some interesting points here. It is worth noting that democracy isn’t really being challenged here, rather the autonomy and authority of individual member states vs. the majority. Certain powers reside with the ECB and Board of Governors that trump the individual member states, regardless of what their democracies have voted on.

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