© Allen & Overy Yannis Manuelides Partner Allen & Overy LLP 10 December 2012 Law, Justice and Development Week

© Allen & Overy Setting the scene –Aspects of the Greek restructuring which are likely to remain relevant for the Eurozone –Qualifications – disclaimer –Assume basics of Greek restructuring –Many new things – some will recur if further sovereign debt reschedulings are to follow –see also

© Allen & Overy First: Absence of legal default –A default which was not –Investors lost money but Greece did not default legally –On its own: payment moratorium in 2010 while it seeks to restructure –With[in] the Eurozone: a managed restructuring –No default since – NB: PSI private sector holdouts –How to avoid it –Prevention mechanisms: eg escrow account and budgetary oversights and automatic correction mechanism –Cost too high: all creditors bound together –Eurozone policy: –to minimise contagion –give the markets the message that its unity or dissolution is a matter for the Eurozone to decide

© Allen & Overy Second: retrofitted CACs/domestic law to change terms –Assumption: in a crisis, financing needs of the weaker Eurozone countries will exceed the scope of Eurozones current tools –If so, existing bondholders will be asked to contribute in some sort of PSI, e.g. maturity extension –Because of the no legal default policy, the Eurozone will want to proceed on this as consensually as possible –The best way: contractual collective action clauses with aggregation provisions –But majority of the Eurozone debt stock is governed by domestic law with no aggregating CACs (if any CACs) –Key tool is therefore more likely to be a scheme such as retrofitted CACs –Unease in the use of such CACs - market acceptance will depend on the number of purely voluntary acceptances –consistent with both actual aggregating CACs and other successful sovereign restructurings –Note: so far there has been very little challenge to the retrofitted CACs

© Allen & Overy Third: from domestic to non-domestic law –No legal default & the domestic law sword of Damocles raise questions: –What are the debtor limits if the Eurozone (and others) are prepared to make payments? How do you define the classic debt trap in such a situation? –[European] market participants may accept this as an interim solution, but will not want to find themselves under the same threat again. –They condition for their participation –sensible overall terms and –an insulating law against unilateral sovereign action and capital controls –NY law & English law: public utilities, pillars architecture of global debt markets –But - English law –UK perceived as Euro-snarling –creeping Eurozone nationalism –A repeat of the animosity of years ago with the English language? –But - NY law –weaker version of the previous arguments –Argentina litigation may make them see it as a less debtor friendly jurisdiction

© Allen & Overy Fourth: who bears the losses? Creditor committees –Who bears the losses in a currency union? –"no legal default" principle - the "not my taxpayers" principle –"Let the imprudent investors bear the losses –Who holds the debt? Who are these imprudent investors? –Losses passed on to imprudent European investors result in –Bank recapitalisation –pension deficits covered and –the promise of a reward for hard work dashed –Increased complexity in currency union with confederate constitutional features –Private sector creditor committees not just desirable but necessary –Pros for having a creditors' committees (sounding the market, verifying and disseminating information, having a single negotiation, and an endorser of a solution) are magnified by the Eurozone's special circumstances. –The cons (shifting membership, sufficiently representative, access to inside information, and co-operative tactics) were all shown to be manageable –An inevitable feature of sovereign workouts in advanced economies

© Allen & Overy Fifth: Priorities and burden sharing – an issue at the heart of re-building the Eurozone –In tussle to determine "who pays what" priorities will be asserted –Greek restructuring saw –the ECB, the NCBs and the EIB assume priority in the middle of the process –Individual member states like Finland sought to bolster their own position. –More generally ESM asserted priority for itself –The issue of priorities will continue to be hotly debated –What is the role of institutions at the forefront of these rescues such as the IMF? –Relevant factors –special role of these institutions in providing a resolution to the crisis –"new money" which they bring –source of the "new money –Size of amounts involved in the new capital structure of the sovereign involved. –My predictions (aiming to provoke): –The IMF's priority will be challenged, but will hold, In the process we will see its contribution diminish in amounts but possibly strengthen institutionally. –The ECB will participate on a no win no loss basis. The NCBs and the EIB will be treated as ordinary investors. –The ESM, EFSF and bilateral loans will participate in the losses as some of their exposure will mutate into the fiscal transfers without which the union cannot survive.

© Allen & Overy Questions? These are presentation slides only. The information within these slides does not constitute definitive advice and should not be used as the basis for giving definitive advice without checking the primary sources. Allen & Overy means Allen & Overy LLP and/or its affiliated undertakings. The term partner is used to refer to a member of Allen & Overy LLP or an employee or consultant with equivalent standing and qualifications or an individual with equivalent status in one of Allen & Overy LLP's affiliated undertakings. BK: WB Dec 2012.PPT