One of the world's leading experts on debt restructurings has proposed extending the maturities of Cypriot sovereign bonds and giving uninsured depositors in its banks certificates of deposit (CDs) as a solution to the Mediterranean island's crisis.
In a paper entitled "Walking Back from Cyprus", Lee Buchheit of New York law firm Cleary Gottlieb Steen & Hamilton and his frequent collaborator, Mitu Gulati of Duke Law School, say European governments "trespassed on consecrated ground" with their plan to impose a levy on insured depositors in Cyprus.
They sketch out an alternative which would protect savers with deposits under 100,000 euros ($130,000) and grant those above that level 5-10 year interest-bearing bank CDs corresponding to the amount of their savings in excess of the insured threshold.
In addition, the maturities of all sovereign bonds would be extended by a fixed number of years, for example five.
"By our reckoning, this would reduce the total amount of the required official sector bailout funding during a three-year program period by about 6.6 billion euros," the paper says.
Euro zone finance ministers reversed course and urged the Cypriot government on Monday to exempt small savers from a planned levy on deposits agreed at a meeting in Brussels in the early hours of Saturday.
But the Cypriot parliament was still expected to reject the 10 billion euro bailout deal in a scheduled vote on Tuesday, which may be pushed back if failure looks inevitable. Cyprus risks default and a banking collapse if it is unable to find a way out of the impasse.
That is why the Buchheit and Gulati proposal, a draft of which was published on the website of the Social Science Research Network on Monday, may be relevant. Buchheit has crafted or advised on debt restructurings for the past 30 years, including those in Uruguay, Greece and Iraq.
The authors argue that the CDs would lock in funding for Cypriot banks for many years, while the bond extension would avoid the need for those maturities to be repaid out of official sector bailout funds.
They concede that their solution could raise a number of objections - among them that Cypriot banks would still need to be recapitalized and that the banks themselves own most of the country's debt.
European governments and the International Monetary Fund (IMF) might also object to a solution which may not address their concerns about debt sustainability in Cyprus.
But the authors present their proposal as the least painful and risky of a limited number of unattractive options. ($1 = 0.7717 euros)
(Writing by Noah Barkin, editing by Mike Peacock)