Tackling the European Debt Crisis
On June 6, the influential Financial Times’ blog “Alphaville” gave consideration to a novel proposal developed by four Duke Law students for addressing Italy’s liquidity crisis. Using a creative interpretation of an Italian decree, the students proposed that Italy extend the maturities of existing debt that had been borrowed at low rates. Doing that, instead of borrowing on the markets at high rates, could help it weather the current crisis, the students suggested.
“We recommend that Italy reprofile its debt by extending the maturities on the medium to long-term debt governed by Italian law,” wrote Andrew Edelen, Paige Gentry, Jessalee Landfried, and Theresa Monteleone, all of the Class of 2013. “By extending the maturities, Italy can lock in lower interest rates, which will give it the stability it needs to weather shocks to the market and demonstrate its fiscal responsibility. Italy’s debt stock is ideal for a reprofiling as a majority of its debt consists of instruments that can easily be changed and because Italian banks own a large percentage of the debt … a majority of its bonds have low coupon rates, are governed by Italian law, and have no contract terms.”
The students developed the idea of maturity extension in their International Debt Finance class this spring. Taught by Professor Mitu Gulati (and frequently joined by Professor Michael Bradley of Duke’s Fuqua School of Business and other scholars and lawyers working on debt issues), the course focused on solutions to the ongoing Eurozone sovereign debt crisis. Bradley and Gulati are currently involved in empirical work aimed at evaluating solutions to the crisis; they were drafted to teach the course by Associate Dean Elizabeth Gustafson ’86, who saw the unfolding crisis as a rare teaching and learning opportunity — and one that fit well with the Law School’s integrated learning model, which blends substantive law with hands-on learning.
Gulati also has collaborated with Lee Buchheit, a partner at Cleary Gottlieb Steen & Hamilton and a prominent sovereign debt expert. Their recent work was profiled in a March 6 New York Times story, “An Architect of a Deal Sees Greece as a Model,” and has been particularly influential in the negotiations over Greece’s debt.
As he has presented ideas for addressing the various Eurozone debt problems to scholars and lawmakers, Gulati frequently draws from the work of his students, noting that they have developed a range of creative and impressive ideas relevant to the debt crisis. “It was fun to teach students who were willing to think outside the box,” he said. “I learned a lot from them.”
Some examples: Melissa Boudreau ’13 explored the legality of a mandate to retrofit certain contract provisions (specifically collective action clauses) into local law bonds, which constituted the vast majority of Greece’s debt prior to its restructuring in March 2012. In her paper “Restructuring Sovereign Debt Under Local Law: Are Retrofit Collective Action Clauses Expropriatory?,” 2 Harvard Business Law Review Online 164 (May 8, 2012), she drew on international and domestic materials to evaluate whether passage of the mandate would create an opportunity for disgruntled creditors to bring successful lawsuits in American courts. Her paper has implications for litigation that is the likely fallout of the March restructuring of Greek debt, Gulati said.
Keegan Drake JD/MBA ’14 studied the implementation of collective action clauses (CACs) in existing sovereign bond contracts. For his paper “Disenfranchisement in Sovereign Bonds,” Drake analyzed hundreds of foreign-law sovereign bond contracts and found that some sovereign debt instruments allow a government to vote to modify its own contract terms and reduce its obligations to private creditors. Gulati said that Drake’s findings have direct relevance for the ongoing attempts to draft new sovereign bond contracts that ensure more orderly resolutions for future crises.
Yet another team of second-year students, including Boudreau, Matt McGuire, Logan Starr, and Andrew Yates, developed a paper encouraging Italy to lessen its debt load through a voluntary bond exchange in which Italy issues new Italian-law bonds with reduced principal in exchange for increased investor protections against further restructuring.
Gulati credits his students with contributing notable scholarship and useful proposals for resolving the European debt crisis. “They worked extremely hard on difficult and contentious questions and did much more work than I could reasonably have asked of them,” he said. “It is superb work.”