In Bondage

‘As Greece prepares to restructure its debt yet again, the Corporation of Foreign Bondholders must resume business’

Economy Open Season

This time it’s different: how those delusive words must haunt all those who took Greece’s promises to pay at their face value. Greek bonds are now priced for restructuring or default and stand at a modest premium over tram tickets. Where is the Corporation of Foreign Bondholders when, once again, we need it? 

At another time — that is, in the Victorian City of London — the merchant banks raised money and shipped it all over the world. They found ready takers for bonds that were backed by the full credit of a state or government, for what, short of Her Majesty’s Government’s own credit, could be safer? Even so, as time went on the lenders found that some borrowers could not keep up and others would not. Even the State of Mississippi, with $7 million outstanding, found an excuse to stop payment, and did not resume.

What were the bondholders to do? They could not exactly foreclose on Mississippi or send a gunboat up-river. When Egypt defaulted, Gladstone bombarded Alexandria, but that was an exception. On their own, the bondholders knew that they were helpless, but together they would have leverage, so in 1868 they formed a corporation to look after their interests and act for them. It went on to gain its own Act of Parliament, partly to stop the banks cutting out the best deals for themselves. The Corporation of Foreign Bondholders became a City institution.

Its strongest card was the realisation that, sooner or later, the non-paying countries would need to come back to the market and borrow some more. Before they could do that, they would have to repair their credit, and that would mean coming to terms with the Corporation. Negotiations like these could be a labour of Sisyphus, but more effective. In its time, the Corporation found itself in charge of bonds with a total face value of £1,000 million, most of it borrowed in solid golden Victorian pounds.

In the new century, war and revolution overtook the markets. Now the negotiations had to be with the successor states of vanished empires-Ottoman, Austro-Hungarian and, on a scale of its own, the empire of the Tsars. Year by year, the Corporation’s reports would carry long, mournful lists of Russian railways whose secured and bonded obligations were of no concern to Lenin’s regime or to Stalin’s. Even the uneasy peace, or interlude between two European wars, brought more defaulters.

Greece — first time round, that is — was a late addition to the list. By 1932 the troubles of others proved too much for its government, which went some way into default. Wearily the Corporation returned to its labours. After five years it turned down Greece’s opening offer, but in 1940 came another which it was provisionally minded to accept. Then the Italians tried to invade Greece, and the Germans succeeded, and all bets were off.

They remained off for two decades, but the Corporation kept trying. Greece had moved into a world where a black mark against its credit was expensive. In 1962 its dollar debts were settled, and two years later the Corporation could report that, “after a prolonged interchange of views”, it had come to terms with the Greek government. There would be an offer to holders of its external sterling bonded debt.  

Holders of these bonds, who had not seen any money for a quarter of a century, could breathe more easily — at least until they read the small print of the offer. Some of them must have subscribed for the 6 per cent bond for public works, issued in the year before Greece stopped paying. Others may have stuck with the 5 per cent of 1890, which had helped to build the railway from Piraeus to Larissa, or was meant to. In all, there were 14 different issues of these bonds, and none of them would now be repaid at their face value.

Instead, the holders were invited to exchange them for new bonds, which would pay interest at a rate roughly half of what their predecessors were supposed to pay. There would also be a modest payment in exchange for all the interest which had gone unpaid for all those years and, in theory, had been mounting up. In practice, this worked out at two years’ interest. The bondholders had no choice. They ate what they were given and without their Corporation would have had to go hungry.  

With Greece’s debt settled, the Corporation ploughed on, gamely striving to work itself out of a job. In 1987 it had something of a triumph when it came to terms with China. From the days before the People’s Republic, there was £60 million of debt left over — all those railways, all those public works. China’s rulers cleared the decks for their country’s economic resurgence and its transformation into a creditor country. They settled for £23 million. 

Time had been on their side. The golden Victorian pounds that the mandarins had borrowed could now be repaid in notes whose worth had been eaten away. As always, inflation had proved to be the debtor’s ally. Today China’s rulers find themselves holding the bonded obligations of the United States government in a constantly increasing, colossal stockpile, and must wonder whether the same trick is being played on them. 

With China off its books, the Corporation of Foreign Bondholders found its workload much reduced. There were still some 60-year-old debts outstanding from the City of Dresden and the Free State of Saxony. Polite letters were addressed to the Governor of Mississippi: “The Corporation cannot acquiesce in an unjustifiable default merely because it has been successfully maintained for many years.” No comment. It seemed to be time to draw stumps and, after 121 years, to wind the Corporation up.

Those rust-coloured annual reports had at least served as reminders of what happened last  time. They showed the hazards that may be involved when money must be pursued across frontiers. They showed that sovereign borrowers may have the weaknesses of ordinary borrowers and, in some ways, may be harder to pursue. Even so, every new generation in financial markets is ready to believe that, this time, it will be different.

Now the chances must be that, for the second time in half a century, Greece will have to restructure its debt, and we shall be lucky if no other country follows. As for the bondholders — big banks so prominent among them — they will need all the leverage that they can get. Fortunately, a proven Victorian model is at their disposal. They should bring it back and set it to work.