707969

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PASXXX10.1177/0032329217707969Politics & SocietyKalaitzake

Article
Politics & Society
2017, Vol. 45(3) 389­–413
The Political Power © 2017 SAGE Publications
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DOI: 10.1177/0032329217707969
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in the Greek Debt Crisis

Manolis Kalaitzake
University College Dublin

Abstract
Through empirical investigation of the Eurozone and Greek debt crisis 2010–12,
this article demonstrates how a peak organization of financial firms—the Institute
of International Finance (IIF)—was able to mobilize its members transnationally to
secure several key political and economic objectives. At the height of the crisis, large
European banking firms were threatened by the prospect of a disorderly Greek
default, coercive intervention by governments, and, potentially, a regional banking
collapse. In this context, representatives from the IIF entered the policymaking
process to facilitate concerted private sector action, assisting EU officials with
the negotiation of a substantial and orderly creditor writedown, and cooperating
with legal action by the Greek government to sideline a minority of financial firms
hostile to the deal. The article shows that the IIF’s disproportionate influence
over policymaking was a result of their technical expertise, their ability to recruit
individuals with long-standing experience of sovereign debt restructuring from the
public and private sector, and the operation of elite revolving-door processes. In
contrast to recent studies showing that financial actors are able to exercise more
power at the national level by remaining collectively inactive, these findings suggest
that, at the transnational level, financial actors can be most effective at securing their
preferences when they are well organized and when they coordinate politically on
the basis of collective interests.

Keywords
financial political power, structural and instrumental power, transnational organization,
Eurozone crisis, Greek debt crisis, Institute of International Finance, financial elites

Corresponding Author:
Manolis Kalaitzake, University College Dublin, Belfield, Dublin 4, Ireland.
Email: [email protected]
390 Politics & Society 45(3)

The ability of the financial industry to influence policymaking outcomes has been
a prominent topic since the financial crisis of 2007–8. Most analyses make the
familiar division between studies of instrumental power, which focus on the strate-
gic mobilization of financial actors in order to have their political preferences
implemented, and studies of structural power, which emphasize the role of finan-
cial markets in withdrawing or restricting capital investment, thus indirectly pres-
surizing policymakers to pursue finance-friendly policies. Nevertheless, several
authors have tended to blur the sharp distinction between these different modes of
influence. They look instead at the intrinsically reciprocal nature of finance-gov-
ernment interactions and show that the level of organization (or disorganization)
displayed by financial sector actors is a key determinant of their ability to secure
favorable policy outcomes. This article follows this recent line of thinking in the
empirical context of the Eurozone crisis and Greek debt restructuring negotiations
in the period from 2010 to 2012.
Although much has been written about these events, little scholarly attention has
been paid to the role of the financial industry representative, the Institute of
International Finance (IIF), throughout the negotiations.1 By contrast, this article
contends that IIF involvement is a critical untold story of the Eurozone crisis and
one that illustrates much about the nature and extent of financial political power
within contemporary society. A case study analysis of the Eurozone/Greek debt
crisis shows how persistent market instability and contagion effects threatened
major European banking firms on several fronts and instigated a severe collective
action problem. Faced with this scenario, the IIF entered the political stage to orga-
nize the banking industry on the basis of their collective interests and to assist EU
authorities in the negotiation of a voluntary writedown acceptable to a majority of
Greek creditors. While banking firms suffered a substantial headline loss from this
debt restructuring deal, it was seen as a small price to pay for a wide range of politi-
cal and economic upsides: avoiding a disorderly default, mitigating the risk of a
regional banking collapse, forestalling the threat of coercive government interven-
tion, effectively severing private bank exposures to Greece, and attaining of a range
of generous government inducements.
The political influence of the IIF was transmitted through several mechanisms that
the organization was uniquely configured to exploit. First, as a result of its extensive
financial expertise and technical knowledge of the debt restructuring process, the IIF
engaged in a form of political capture. It was able to recruit key figures with extensive
experience of the process on both the financial side and the intergovernmental side, and
to leverage their technocratic capacity to facilitate the coordination of creditors around
a workable deal. The IIF also maintained a close relationship with legal advisers work-
ing on behalf of the Greek government, assisting in the formulation of several key
compromises that characterized the final resolution. Second, reflecting the influence of
revolving-door networks, the IIF maintained an insider political status due to a wide
array of informal and professional interlinkages between individuals working for the
organization and senior policymakers from EU institutions and national member states.
Similarly, the high-profile status of several key IIF figures, particularly within the area
Kalaitzake 391

of financial governance, facilitated access to policymakers. Both mechanisms inter-

acted to ensure that the IIF held disproportionate sway over policy outcomes.
The article proceeds in five parts. In the first section I review some of the recent
literature on financial political power before theoretically framing the role of the IIF
as an effective coordinator of financial sector interests at a transnational level. In the
second section, I contextualize the empirical discussion by examining the variety of
threats posed by the Eurozone crisis and the fateful decision by EU authorities to forgo
the option of immediate debt restructuring in Greece. In the third section, I explain
how and why the EU invited the IIF to assist them in negotiating a voluntary write-
down. The fourth section demonstrates how an acceptable agreement was eventually
enabled by closing off the negotiation process to all but a small group of experienced
debt restructuring insiders, thus facilitating a deal skewed toward the interests of large
European banks. The conclusion reiterates the core findings and reviews some of the
broader implications of the case study.

Financial Political Power and the Crisis

The financial crisis has renewed scholarly interest in examining the political power of
the financial industry and financial elites, particularly across the fields of political sci-
ence, sociology, and international political economy.2 The great value of this literature
is the emergence of an inventory of the wide variety of mechanisms through which
financial actors potentially exert influence over the policymaking process. On an
instrumental level, authors typically stress the material resources financial actors have
at their disposal, while also examining the strategic character of their lobbying activ-
ity, for instance, the distinctive arguments used in their advocacy, the effects of timing
in their political engagement, and the exploitation of opportunities to leverage their
influence by allying with nonfinancial sector groups.3 Other authors advance a view of
postcrisis regulatory capture, demonstrating how financial actors remain deeply
embedded within tight-knit and closed governance circles, and influence political out-
comes by their technical expertise and industry know-how.4 In this context, revolving-
door politics, rather than explicit lobbying of politicians, continue to give financial
actors privileged access to decision-making circles, and thus facilitate a more opaque
and surreptitious sway over policy outcomes. A number of studies also focus on the
modalities of finance’s structural power, highlighting the capitulation of policymakers
when faced with the possibility of declining investment and economic stagnation. In
the domain of postcrisis financial regulation, for instance, authors have illustrated how
a persistent dynamic of competitive deregulation between national jurisdictions has
stymied more serious efforts at financial sector reform.5
However, in more recent literature, several authors have problematized the sharp
conventional distinction between instrumental power and structural power. For Bell
and Hindmoor, the effective influence of structural power involves a wider range of
social phenomena beyond the immediate market pressures of capital flight and disin-
vestment. This is because policymakers’ interpreted understandings of the conse-
quences of their action are always contingent, and policy choices are heavily mediated
392 Politics & Society 45(3)

by specific institutional settings, normative and ideological commitments, and their

interactive relationship with financial agents.6 This outlook characterizes a construc-
tivist and agency-centered perspective on structural power whereby political outcomes
are not “automatically” determined by the impersonal dictates of liberalized financial
markets. As Bell puts it, “power is not just an objective condition but is shaped subjec-
tively and intersubjectively; it is a relational artefact, produced and mediated through
social and ideational realms.”7
Culpepper and Reinke also explicitly reject a simple dichotomy of instrumental
power arising from the “strategic” behavior of financial actors, and structural power
arising from the “automatic” response of financial markets, arguing instead that both
dimensions of power have automatic and strategic aspects. To illustrate this point, they
highlight the strategic capacity of financial firms to utilize their respective levels of
“home” market dependence in negotiating with political leaders during the UK and US
bank bailouts in 2008. The authors make the claim that certain financial firms were
able to exploit deliberately, and with strategic intent, their unique structural market
position—in that case, when most of the firm’s revenue comes from outside their
home country—to escape unwanted regulatory involvement.8 In a later study,
Culpepper contends that structural power is best conceived of as a reciprocal depen-
dency between states and (financial) businesses.9 Financial firms may exercise influ-
ence over state authorities through the flow of capital within globalized financial
markets, but those firms also depend on states to create the conditions for a stable
investment environment and the enforcement of laws that allow markets to function
effectively. This codependency was illustrated dramatically during the financial crash
of 2007–8, when financial firms had to accept strong state intervention to save the
entire industry, while states were compelled to do so in order to protect investment and
capital flows throughout the economy.
Along similar lines of thinking, Woll emphasizes the distinction between politically
organized and politically disorganized national financial sectors. Woll deploys this
distinction in a cross-national comparison of four bailout schemes (within Germany,
France, Denmark, and Ireland) to illustrate how certain financial institutions were able
to exert greater power by remaining “collectively inactive,” leaving the government to
carry the burden of stabilizing the economy.10 More specifically, she argues that varia-
tions in the costs of different national bailout schemes depended crucially on the will-
ingness or capacity of the banking sector to act collectively and in coordination with
the government. In cases where the organized activity of finance was present, such as
in France and Denmark, the cost to the public taxpayer was relatively low; in cases
where organized activity was absent, such as in Germany and Ireland, the cost of the
banking rescue was considerably higher. Woll illustrates the power dynamic between
the financial sector and national governments as a game of chicken, in which two cars
drive toward one another at full speed. In the German and Irish cases, Woll proposes
that the financial sector adopted a strategy of inaction, which in turn forced the gov-
ernment to assume the cost of crisis management.
This article considers the new directions in research concerning financial political
power as a sound framework for a theoretical understanding of the involvement of the
Kalaitzake 393

IIF in Greek restructuring negotiations. That framework problematizes the sharp dis-
tinction between instrumental and structural power, is receptive to the constructivist
role of political action, pays attention to the mutual reciprocities between businesses
and states, and identifies the level of political organization or disorganization of the
financial industry as a significant factor in determining its influence. The latter vari-
able (political organization) is especially relevant: although financial actors may exer-
cise substantial structural power by virtue of their size and the importance of capital
flows throughout the economy, it is still vital, especially in times of crisis, that they
figure out what message to deliver to government authorities. That strategic consider-
ation is actually one difficulty with Woll’s proposition concerning the (dis)organiza-
tion of finance during the 2008 bailouts: the problem—admitted by the author—is that
the analyst is unable to conclude definitively whether “collective inaction” is the result
of the intentional strategy of financial firms or is due to their fundamental incapacity
to cooperate on a collective basis.11
This epistemological ambiguity notwithstanding, Woll does provide a compelling
argument that the disorganization of finance goes a long way to explain firms’ ability
to exert power and secure favorable bailout terms at the national level. However, the
provision of a second bailout in 2012 for Greece by EU authorities, ultimately depen-
dent on the facilitation of a workable debt restructuring agreement, suggests an alter-
native story. This case indicates that at the transnational level of analysis, the capable
organization of finance—more specifically, the banking sector—was actually the key
factor determining an outcome that was highly beneficial to its collective interests.
Moreover, an advantage of this case is that, because the active organization of the
banking sector is based on its pursuit of specific political and economic objectives, it
allows us to be quite clear about the sector’s intentions and to separate them from the
scope and limitations of its capacity to act. As will be demonstrated in the empirical
material that follows, banking elites were able to organize and construct favorable
solutions to their own collective action problem, and to wield effective influence over
policymakers in order to have these solutions implemented. Such organization mani-
fested itself through the political engagement of the IIF, who participated in a form of
“club governance” transnational policymaking whereby private influence is transmit-
ted through the reputational status and consensus-building track record of financial
elites.12 The analysis thus shows that financial actors were not simply passive specta-
tors of government interventions designed to combat market instability, but deliberate
policymaking participants whose involvement allowed the European authorities to
secure a deal they otherwise may have been unable to achieve.
The fundamental source of a collective action problem for the financial industry is
the fact that each individual actor behaves rationally in terms of its perceived self-
interest, yet unwittingly creates the conditions that harm the group as a collective. As
such, there is a pressing demand for an organizational agent to foster consensus build-
ing and cooperative behavior to ameliorate these harms. Of course, although individ-
ual private sector firms may engage in direct political lobbying to a greater or lesser
extent, they are in no way designed to undertake a coordinating political role on behalf
of the wider industry. Instead, dedicated business associations are typically geared for
394 Politics & Society 45(3)

such an exercise due to their institutional detachment from market pressures and their
ability to present themselves to the official sector as independent of any particular
firm. Furthermore, their limited size allows them to capitalize on small-group efficien-
cies such as better task coordination and more decisive decision making.13 These
advantages positioned the IIF as a natural agent of political coordination on behalf of
the private sector once the Greek debt crisis took hold.
During the process of mobilizing to overcome the collective action problem, crucial
lines of division between different financial actors emerged—divisions that highlight
the conflicting goals of discrete financial subsectors. The key dividing line on the issue
of Greek debt restructuring was between major banking firms and hedge funds. As the
primary representative of large European banks, the IIF was keen to secure a restruc-
turing deal that would dramatically reduce the banking sector’s exposure to Greek
bond holdings, even if that meant accepting a large writedown. However, in order to
achieve this aim, they had to overcome the objections of “vulture” hedge funds, whose
primary aim was to maximize their short-run gain and who were thus highly resistant
to accepting large losses on their bond holdings. This division may be conceptualized
as between actors disposed to take a longer-term perspective on financial sector stabil-
ity, such as banks (and insurance firms)—typically regulated firms with a fundamental
economic interest in the stability of European financial markets—and those who take
a shorter-term perspective, such as hedge funds—typically unregulated and risk-ori-
ented entities specifically configured to take advantage of volatile market conditions.
As the 2008 financial crash illustrated, banking firms stand to lose big when there is
severe market turmoil, particularly when their market position is closely tied to the
region experiencing stress. Cascading regional turmoil can rapidly morph into sys-
temic meltdown, opening the door to extensive government intervention and the
potential takeover of systemically important financial units. However, other market
participants are custom-built to leverage opportunities that present themselves during
times of crisis, such as strategically buying into stressed bonds, holding out on negoti-
ating better terms for debtors, and even threatening to pursue legal action if repay-
ments are not forthcoming.
These intraindustry antagonisms arose as the Eurozone/Greek debt crisis gradually
played out, requiring the IIF, EU authorities, and legal representatives of the Greek
state to collaborate closely in order to circumvent the objections of hedge funds and
secure majority acceptance for an orderly writedown. The article now turns to the
empirical case of the Eurozone crisis.

Structural Power in the Eurozone Crisis

Throughout the crisis, design flaws in the Eurozone architecture facilitated an excep-
tionally high degree of structural power of financial markets over policy officials and
rendered many member-states powerless in the face of a severe external shock. In the
absence of fiscal union and the inability of periphery member states to devalue their
currency, policymakers considered harsh internal devaluation as the only path to
regaining debt sustainability. This deflationary policy aroused severe doubts among
Kalaitzake 395

investors about the ability of various countries to finance maturing bonds in the future.
Furthermore, the European Central Bank (ECB) refused to provide an explicit guaran-
tee to financial markets that it would act as a lender of last resort to support sovereign
borrowing.14 As a consequence, sovereign bonds were targeted by financial investors
worried about the sustainability of Greek government debt, sharply increasing the
state’s borrowing costs. In addition, the market for credit default swaps and the consis-
tent monitoring by credit rating agencies also played a key role in signaling financial
fragility to market participants.
Routed from all sides by financial markets, rhetoric from leading European politi-
cians began to turn on these forces of structural power, beginning with a deep suspi-
cion that predatory hedge funds were “targeting” Greece and prompting Greek prime
minister George Papandreou to condemn the “ulterior motives” of those dumping his
nation’s debt.15 Similarly, consistent downgrades by the big three Anglo-American
rating agencies undermined the acceptance of periphery “junk” collateral by the ECB
and provoked the European Commission president, Manuel Barroso, to claim a market
bias in the evaluation of European member states.16 Those comments reflected the
frustration of EU leaders concerning their inability to steer financial market sentiment.
Explicit recognition of the unique strength of financial market power over Eurozone
members was illustrated dramatically by Eurogroup president Jean-Claude Junker,
who expressed the potential for coercive political action that is always part of govern-
ment’s arsenal in calming market disruption: “We have to strengthen the primacy of
politics. We have to be able to stop the financial markets. . . . We have the instruments
of torture in the basement. We will display them if it becomes necessary.”17
This pronouncement was indicative of the growing likelihood that the EU would
take coercive action once all other avenues for regaining market stability were
exhausted, and underscored a growing threat to the European banking sector, which
was hugely exposed to stressed Eurozone bonds.
The improbability of Greece’s recovering financial health through internal devalu-
ation was recognized not only by market participants but also by high profile com-
mentators who advocated an immediate debt restructuring or writedown.18
Nevertheless, the Troika—the International Monetary Fund (IMF), the ECB, and the
European Commission—eschewed that option and made the decision in May 2010 to
move ahead with a €110 billion bailout package that provided the Greek state funds to
pay off existing and maturing bondholders up front and on time. In return, Greece
committed to drastic fiscal retrenchment under the terms of a supervised structural
adjustment program. An official IMF retrospective report into that bailout provides
important insights into the thinking behind the process and the conflicting views of
different actors. The IMF, having no illusions about the structural flaws of the
Eurozone, stressed the lack of exchange rate flexibility and targeted monetary aid to
assist adjustment.19 Given those dysfunctions, the IMF was unconvinced of the feasi-
bility of bringing Greek debt back on track; “the fund worried that debt was not sus-
tainable with high probability.”20 The IMF also admits that projections about growth,
routinely missed, were premised on hugely ambitious assumptions for a nation under-
going internal devaluation. In normal circumstances, such concerns would have barred
396 Politics & Society 45(3)

access to funds; however, given the “systemic” nature of the crisis, the “exceptional
access criterion was amended to lower the bar for debt sustainability.”21
On the crucial issue of debt restructuring, the report makes clear that responsibility
for avoiding a creditor writedown resided firmly with EU officials:

One way to make the debt outlook more sustainable would have been to attempt to
restructure the debt from the beginning. However, PSI [private sector involvement] was
not part of the original program. This was in contrast with the Fund program in Uruguay
in 2002 and Jamaica in 2011 where PSI was announced upfront. In Iceland in 2008,
foreign creditors (albeit private bank depositors) were bailed in ex ante via capital
controls. . . . Yet in Greece, on the eve of the program, the authorities dismissed debt
restructuring as a “red herring” that was off the table for the Greek government. . . . In
fact, debt restructuring had been considered by the parties to the negotiations but had
been ruled out by the euro area. [my italics]22

The decision to forgo restructuring entailed a careful risk/trade-off calculation on the

part of European policymakers, largely framed by the anticipated reaction of financial
markets. Several interrelated threats—to both the official sector and the banking sec-
tor—drove the European Union’s choice. A primary concern was the danger of conta-
gion to other parts of the Eurozone area, particularly to other periphery economies in
the crosshairs of financial markets. Eurozone officials feared that an imposed creditor
writedown in Greece would trigger a “Lehman-type event” resulting in banking runs
and rising borrowing costs for already embattled Eurozone economies.23 The level of
banking exposure to these nations was enormous, with an estimated €2 trillion of public
and private exposure to Spain, Portugal, and Greece by all foreign institutions.24 The
major threat on the horizon was a breakup of the Eurozone, which would constitute a
calamitous economic cost, not just for the European economy and its financial system,
but for the entire global economy. The fundamental logic of the strategy pursued, then,
was to buy enough time to erect more substantial firewalls around other vulnerable
economies: what the IMF review specifically refers to as “a holding operation.”25
Strong resistance from the ECB was another key determinant behind the decision
to rule out immediate restructuring. Institutionally, the ECB’s mandate to protect the
integrity of the single currency would be severely undermined by a renegotiation of
debt denominated in Euros and ran counter to the ECB’s general philosophical orienta-
tion toward strict monetarism. Trichet was a consistent opponent throughout the 2010–
12 period of any form of writedown and warned officials of the need to “improve
verbal discipline” in order to maintain market confidence.26 In May 2011, he was
reportedly “apoplectic at the loose talk” of a soft reprofiling contemplated by Eurozone
leaders, and refused to discuss that option with finance ministers.27 Exemplifying the
ECB view, Bini Smaghi, Trichet’s colleague on the Executive Board, declared that an
attempt at restructuring would be “political suicide” because of the damage to a coun-
try’s reputation in the eyes of investors.28
Perhaps the main reason behind the resistance to immediate debt restructuring was
the massive level of direct exposure to Greek government debt experienced by other
systemically important European banks. All major European banking firms were
Kalaitzake 397

Table 1.  Composition of Holdings in Greek Government Debt (Billions of Euros).

May 2010 July 2011 February 2012 April 2012

Failed First
First Assistance Restructuring Before After
  Package Attempt Restructuring Restructuring
Private Sector 303 213 206  71
Official Sector n/a  50  60 189
Total Greek Debt 320 345 365 280
Private Creditor 94% 62% 56% 25%
% of Greek Debt

Source: Author’s calculations from Eurostat; Jones, “Greek Debt Talks Open Pandora’s Box.”30

affected, including BNP Paribas, Credit Agricole, Société Générale, Groupe BPCE,
Deutsche Bank, Commerzbank, UBS, Credit Suisse, ING, HSBC, RBS, Unicredit,
and Dexia. Domestic Greek banks also held a significant portion of the debt, including
Alpha Bank, Piraeus Bank, Eurobank ERG, and National Bank of Greece. Thus, it was
clear that any creditor losses would inflict significant damage on core European bank-
ing systems, already vulnerable in the aftermath of the 2007–8 financial crisis. Given
the scale of the European financial sector, losses on Greek bonds were manageable in
isolation, as total private sector debt exposure to Greece approximated €300 billion
(Table 1). The key concern however was the optics of such an event vis-à-vis financial
markets: Greek restructuring would send a clear signal about the general strategy for
dealing with Europewide sovereign debt troubles and thus put investors on notice for
future bail-ins in Spain, Portugal, Ireland, and Italy. Losses from exposures to these
nations collectively was decidedly unmanageable.29
Although the bailout program appeared to be postponing the inevitable, it also
allowed crucial time for private creditors to wind down their exposures gradually. As
noted by the IMF:

The delay provided a window for private creditors to reduce exposures and shift debt into
official hands. This shift occurred on a significant scale and left the official sector on the
hook. . . . An upfront debt restructuring would have been better for Greece although this
was not acceptable to the euro partners.31

In effect, the European authorities guaranteed timely and upfront payments for investors,
while at the same time undermined the prospect of a Greek recovery. In total, almost
€100 billion of Greek debt progressively migrated from the private sector to the official
sector between the first assistance package and the restructuring deal in 2012, as a result
of the repayment of maturing bonds with program financing and ECB emergency bond
purchasing.32 In an immediate sense, then, it is clear that major European banking insti-
tutions were prime beneficiaries of this policy, as the perceived threat of contagion pres-
sured policymakers into an extraordinary concession for private creditors. However, a
398 Politics & Society 45(3)

policy of “kicking the can down the road” could not be maintained indefinitely: eco-
nomically, the policy subordinated the debt sustainability of the Greek state to the imme-
diate health of systemically important banking firms, while politically, it misjudged the
capacity of successive Greek governments to implement such a severe fiscal burden. It
thus constituted a looming threat to banking sector interests and a continuing source of
uncertainty among financial investors. In this manner, the “holding operation” actually
served to exacerbate market tensions over the coming months and engendered the very
consequences that officials were trying to avoid.
Throughout the course of 2011, the currency block was pushed to the brink of col-
lapse by market turmoil, only to be rescued by ECB market interventions to prop up
periphery bonds. In that context, the consequences of a potential Eurozone breakup
were roundly recognized to be catastrophic for European banks and clearly not in their
collective interest.33 As the situation became progressively untenable, policymakers
began to contemplate ways in which they could execute a writedown with minimal
market disturbance, and found a suitable partner in the IIF.

The Logic of IIF Involvement

From approximately the end of 2010 to the eventual debt restructuring in March 2012,
the IIF came to play a key role in the handling of the Greek crisis. The IIF is the finan-
cial sector’s largest business association, representing the largest financial firms oper-
ating at a transnational level, but with a membership that is noticeably skewed toward
banking and insurance firms.34 The organization is led by senior members from those
firms, as well as long-standing elite figures from the world of finance whose careers,
typically, cross the public-private divide.
Founded during the Latin American debt crisis, the organization was the brainchild
of collaboration between senior banking figures and top regulatory officials. The IIF
was meant to operate as a platform facilitating coordinated bank action and to work
constructively with both regulatory agencies and debtor nations in dealing with the
regional crisis unfolding in Latin America.35 In the aftermath of that crisis and in rec-
ognition of more frequent bouts of instability within global financial markets, the IIF
soon established themselves as a prominent partner in various matters of global gov-
ernance, especially in issues of debt management and financial regulation.36
In each of those areas, the IIF’s modus operandi has been to preempt more coercive
(mandatory) reform initiatives from the official sector in favor of more market-friendly
forms of self-regulation. This type of approach came under threat in the aftermath of
the East Asian financial crisis in the late 1990s, which was followed by bouts of mar-
ket instability in Russia, Brazil, and Argentina. In that context, the IMF began consid-
ering proposals for a “sovereign debt restructuring mechanism,” which would create a
statutory framework for creditor-debtor engagement once repayment costs had become
unsustainable. In response, the IIF worked closely with regulatory officials and finance
ministers from several developing nations to persuade them to supporting an alterna-
tive set of voluntary, contractual, and market-based debt management procedures.
These so called IIF Principles encouraged good-faith negotiations between debtor and
Kalaitzake 399

creditor nations, with restructuring conditions that required mutual agreement on a

case by case basis; essentially, a soft-law mode of governance for dealing with debt
crises.37 After widespread acceptance of these guidelines in 2003, the IIF became a
consistent presence in monitoring and facilitating negotiations between debtor nations
and creditor firms. That role as a collaborator with the official sector and an organizer
of collective firm action was reprised in the Eurozone/Greek crisis, with even greater
media attention and higher political stakes than previous IIF interventions.
IIF involvement was initially motivated by the concern that ongoing Eurozone
instability would tempt public officials to engage in a “more dictated top-down pro-
cess” in dealings with creditors by imposing their own terms of agreement.38
Highlighting this threat, a 2012 IIF review of the Greek restructuring points out that
EU authorities faced “strong pressures to deviate from . . . underlying cooperative
guidelines of the Principles and resort to unilateral, top-down decisions on debt crisis
resolution” before a cooperative solution was finally decided.39 Indeed, Merkel and
Sarkozy had publicly indicated a more confrontational approach at Deauville earlier in
2010 by declaring that creditors would be required to accept writedowns in the future.
Nevertheless, an immediate uptick in market volatility quickly forced Eurozone lead-
ers to retreat and clarify that all private sector contributions would be strictly
voluntary.
This experience at least partially explains the subsequent willingness of the official
sector to collaborate directly with the private sector—collaboration that then gave the
IIF the opportunity to articulate consistently the advantages of a voluntary approach to
debt management within policymaking circles. From the point of view of Eurozone
officials, the IIF could provide a valuable platform to coordinate policy objectives
with the majority of Greek bondholders as a unified block. It would also foster stron-
ger policy communication to financial markets more broadly, allowing officials to
better manage policy expectations and anticipate market reactions. More important,
the IIF could offer Eurozone officials a vital institutional understanding of handling
the debt restructuring process—a highly technical and esoteric undertaking, in which
the IIF had built experience through working with developing nations over the course
of decades. By contrast, Eurozone officials found themselves struggling with the
financial knowledge and expertise required; according to private sector participants in
early restructuring negotiations, deliberations became “chaotic” and “confusing”
because the official sector had “little grasp . . . of the technical issues involved,” while
“the private sector [was] significantly more advanced in their understanding.”40
Access to Eurozone consultations was not granted to the IIF simply for functional
and practical reasons, but was also due to long-standing professional ties that con-
ferred to them an insider political status. As a prime example of revolving-door poli-
tics, a plethora of professional and informal linkages between top Eurozone officials
and IIF elites engendered dialogue based on preestablished channels of communica-
tion and trust. Two internal IIF bodies dealing with debt management—the Principles
Group of Trustees (GoT) and the Principles Consultative Group (PCG)—demonstrate
the close public-private interconnections that made the IIF a natural partner for
Eurozone officials. Jean Claude Trichet was chairman of the GoT, a body that also
400 Politics & Society 45(3)

involved the deputy governor of the Bank of Italy, Fabrizio Saccomanni, and Jorg
Asmussen from the German Ministry of Finance. Asmussen later played a key negoti-
ating role in the restructuring deal by being promoted to the executive board of the
ECB in January 2012. Trichet was later replaced as chair of the GoT by Bank of
France governor Christian Noyer, a former ECB vice-president who was also deeply
involved in restructuring negotiations. Important also were the connections of private
financial actors with a role in either the GoT or the PCG who had privileged access to
their national political counterparts, particularly in Germany and France. Chief among
these were Josef Ackermann and Caio Koch-Weser of Deutsche Bank, Klaus Peter
Muller of Commerzbank, and Jean Lemierre and Jacques de Larosiére as advisers to
BNP Paribas. Lemierre was extremely well known to EU policymakers through his
former role as president of the Paris club in 1999 and of the European Bank for
Reconstruction and Development (EBRD) from 2000 to 2008. Jacques de Larosiére
was similarly a veteran of financial governance networks, having served as president
of the EBRD, managing director of the IMF, and governor of the Bank of France, as
well as being tasked by the European Commission to conduct a major financial super-
vision review in the wake of the financial crisis. The ability of the IIF to engage the
services of such individuals throughout negotiations fostered a greater sense of objec-
tivity concerning their political engagement and strongly bolstered their credibility
with policymakers.

The Crisis Intensifies

As Greek debt continued to spiral under harsh austerity, Eurozone leaders finally
agreed in the summer of 2011 to tie a second Greek bailout plan to the attainment of
voluntary private sector involvement (PSI). The IMF was an important force behind
this policy shift, arguing in its periodic structural adjustment review that it would be
unable to commit further funds to the Greek program in the absence of some form of
creditor contribution, and stressing that PSI should be voluntary in order to avoid the
occurrence of a “credit event.”41 The German government also become eager for some
form of creditor contribution, in part to correct the Greek debt trajectory, and in part to
assuage popular domestic anger opposed to ongoing bailout costs. France was consid-
erably more hesitant, as their banks had extensive exposure to Greek debt, whereas the
ECB remained committed in principle against the notion of appearing to impose credi-
tor losses. In the event, Germany emerged with the political upper hand, and at a Euro
summit on July 21, 2011, it was announced that private investors would face some
form of debt writedown in the coming months. However, the agreement also came
with explicit political commitments that the PSI was a one-off occurrence, undertaken
because of the “exceptional and unique” situation Greece found itself in.42
In preparation for this deal, the Eurogroup Working Group—involving finance offi-
cials and representatives from the Commission, the European Financial Stability
Facility (EFSF), the ECB, and the IMF—tasked the IIF with getting Greek creditors to
collaborate and agree on the correct “form and volume” of PSI, with the aim having an
appropriate creditor contribution in place for the upcoming Euro summit in July.43 The
Kalaitzake 401

managing director of the IIF, Charles Dallara, was an important figure in this process.
As former assistant secretary of the US Treasury, Dallara had been a key proponent of
the Brady Bonds scheme during the Latin American debt crisis, which insisted on
restructuring as a condition for resolution. In similar fashion, he played a major role in
convincing the Greek government of the wisdom of restructuring. As reported by the
New York Times:

Paradoxically, it was a representative of the banking industry, perhaps more in tune with
the realities of the marketplace, who finally insisted that Greece could not borrow and cut
its way out of the crisis without restructuring its debt. ‘‘There was shock and surprise on
their faces,’’ Mr. Dallara recalled. ‘‘They could not believe it.’’ Even though work
proceeded on a haircut plan, the Greeks were reluctant to participate. ‘‘They were being
passive.”44

It is clear, then, that the IIF recognized that restructuring was inevitable and that it
would be in the best interests of their members—primarily large, transnationally oper-
ative banks—to adopt a central role and avoid a “dictated, top-down process” that
could lead to further Eurozone instability. Initially, the IIF, in conjunction with leading
EU officials, agreed on a modest 21 percent writedown. However, it quickly became
obvious that a much more ambitious form of debt restructuring was required. After a
minor decrease in Greek refinancing costs after the summit announcement in July,
interest rates began a steep upward incline, at a faster pace than at any time previous.
This initiated perhaps the most serious phase of the Eurozone crisis, as rates jumped
significantly for all other peripheral economies over the next six months, with Greek
rates soaring into the high thirties on the back of exit fears. Conversely, the price of
European banking shares began to plummet, as investors worried that coercive gov-
ernment intervention would soon become necessary, particularly in the context of a
disorderly default by Greece.45
At the same time, a spate of public protests and riots broke out across the Eurozone
periphery, most prominently in Italy, Spain, and Greece, undermining the potential of
governments in these countries to push through further austerity measures. The popu-
lar unrest prompted the IMF to warn in September of a dangerous new “political
phase” of the crisis:

Markets perceive major political economy difficulties as policymakers struggle to raise

support for painful adjustment measures selected from a rapidly shrinking set of feasible
choices. Policymakers have only limited time to reinforce credibility and build defences
against potential systemic shocks.46

“Systemic shock” referred to the now distinct possibility of “Grexit” and a potential
European “Lehman moment” that posed a severe threat not just to the integrity of the
European Monetary Union but also to the entire global economy. Consequently, the
IMF—as well as the United States—pushed hard for EU officials to commit to a much
larger writedown for Greek creditors in conjunction with flexible monetary tools and
fiscal firepower that would stem contagion channels and ring-fence other banking
402 Politics & Society 45(3)

Table 2.  Steering Committee of IIF Private Creditor Committee for Greece.

Institution Home Country Core Market

Allianz France Insurance
Alpha Bank Greece Banking
AXA Group France Insurance
BNP Paribas France Banking
CNP Assurances France Insurance
Commerzbank Germany Banking
Deutsche Bank Germany Banking
Eurobank EFG Greek Banking
Greylock Capital Management United States Investment Banking
ING Netherlands Banking
Intesa San Paolo Italy Banking
Landesbank B. Württemberg Germany Banking
National Bank of Greece Greece Banking
Co-chairs of Committee
  Charles Dallara — —
  Jean Lemierre — —

Source: IIF, Response to the Global Financial Crisis: 2007–2012, 46.

systems across the Euro area. The collapse of Dexia in early October (a result of the
bank’s acknowledging losses on Greek bonds) punctuated the complete failure of the
European “holding strategy,” now acknowledged to be spreading, as opposed to con-
taining, market panic. Adding fuel to the fire was the political chaos gripping Greek
domestic politics: Prime Minister Papandreou called for a surprise referendum on a
second bailout deal, only to rescind the proposal days later under pressure from senior
European leaders and considerable opposition within his own party.47 This failed gam-
bit sealed Papandreou’s fate as he quickly made way for a national unity government
led by former ECB vice-president Lucas Papademos. In this context, European leaders
found an opportunity to insulate the Greek situation from popular pressure and imme-
diately restarted debtor-creditor negotiations with the IIF.

The Path to Successful Debt Restructuring

Renewed negotiations leading to a successful debt restructuring in early 2012 took on a
significantly closed character and resembled the various restructurings that had taken
place in emerging markets over the previous three decades. As such, the IIF was able to
leverage its experience and technical expertise—in personnel, organization, legal
arrangements, strategic approach, and so on—which would heavily influence the final
outcome. The IIF set up an official Creditor Committee, which in turn, voted on an even
smaller steering committee (Table 2) to facilitate in-depth negotiations on behalf of
the wider investor community. This core steering committee consisted of thirteen mem-
bers, ten of whom were publicly regulated financial institutions from Greece, Germany
Kalaitzake 403

or France, whose governments were spearheading the negotiations. At the helm of the
IIF steering committee were former official sector veterans Charles Dallara and Jean
Lemierre. This organizational composition meant that representation of creditor inter-
ests was highly concentrated and specifically geared toward the outlook of creditors
who (a) were officially regulated, (b) were close to European governments, and (c) had
an intimate stake in the overall continuation of the Euro project. Thus, a clear distinc-
tion was established between investors—like the steering committee—with much to
lose from a disorderly default, and those—such as hedge funds or other short-term
speculative holders—with less incentive for constructive deal making. Noticeable was
the marginalization of representatives from the capital market sector. The exclusion of
Vega Asset Management is indicative: as one of the largest hedge fund holders of Greek
public debt and an IIF member that had been present in earlier IIF-Eurogroup discus-
sions, Vega resigned in protest of newly touted restructuring plans targeting a 50 per-
cent writedown, and threatened legal action if the deal was to proceed.48
The team of lawyers and financial advisers recruited by Greece were central to the
negotiations. Chief among this group was Lee Buchheit, known as the “dean of debt
restructuring” for his work on the side of debtor nations in most major debt crises over
the course of three decades. Greece also recruited the services of Lazard, a firm that
had been officially advising Greece on its public finances since 2010, and retained the
services of Buchheit’s former business partner Mark Walker, also a veteran of sover-
eign debt negotiations. Another important figure was Michele Lamarche, who had
previously worked on high-profile debt restructurings in Iraq, Ivory Coast, and
Argentina and whose acumen for securing compromise proved pivotal for bringing the
restructuring to a successful conclusion. As early as December 2011, Lamarche sat
down in private with Jean Lemierre and came up with the plan of cofinancing, whereby
new creditor bonds issued under a restructuring exchange would be on a payment
priority par with EFSF bonds. This was just one of several inducements central to
achieving creditor agreement. Lamarche later declared that her goal was to “identify
the bondholders that are constructive and will be able to apply pressure on their more
aggressive peers”—a critical divide-and-conquer strategy that would put even more
distance between the steering committee and other regulated financial peers vis-à-vis
shorter-term-orientated financial institutions that would threaten holdout, legal action,
and “free-rider” nonparticipation.49 Because of their repeated involvement with emerg-
ing market debt crises, these legal advisers were well known to the IIF and were simi-
larly versed in the standard procedures of debt restructuring, which created an
environment of mutual understanding and cooperation. In a telling interview, CEO
Hans Humes of Greylock Management—one of the few hedge funds predisposed
toward a deal and thus part of the IIF steering committee—stated:

We’re trained, we understood, we’ve been there before. What’s going on in Europe is not
unfamiliar to anybody who’s been involved in what’s now considered to be the emerging
markets. What it’s telling us is that financial and legal advisers to Greece are also the
financial and legal advisers to the Ivory Coast, to Ecuador, to Argentina. . . . when you get
a country that has too much debt and it can’t afford to pay it, you have to go back to the
precedents, and it is the usual gang of suspects who understand what the playing field is.50
404 Politics & Society 45(3)

Figure 1.  Composition of Greek Public Debt in February 2012.

Source: Credit Suisse;54 Porzecanski, “Behind the Greek Default and Restructuring of 2012.”

The final deal was successful in so far as it was agreed on by all those involved
in formal negotiations and swiftly implemented without modifications thereaf-
ter. Furthermore, the resolution did not stoke further financial market panic in
the aftermath and thus avoided the fate of the aborted restructuring attempt the
previous summer. Crucially, the deal effectively resolved the issue of outstand-
ing private debt and the contagion threat this posed to the balance sheets of core
financial institutions within the Eurozone. However, in doing so, the long-term
sustainability of Greek debt was relegated to a secondary concern, with impor-
tant implications for the Greek state further down the line. A key aim of negotia-
tors was to avoid giving the impression to financial markets that private creditors
were being forced against their will, and without autonomous input, into the
restructuring of Greek bond holdings. The Greek restructuring was thus a bal-
ancing act between coercive and voluntary measures: on the one hand, seeking
to achieve the necessary writedown while, on the other hand, providing enough
inducements to convince creditors—and by proxy, wider financial markets—that
a new deal was in their own best interests. This tension is illustrated, again, with
reference to Humes:

I think we had a choice. . . . it’s difficult to say “voluntary, involuntary”—I don’t think
anybody wants to walk away from as much debt as we have, but the alternative is just a
total default by Greece, and I think that that might actually end up being worse for
everybody.51

Total Greek debt at the time of negotiations was approximately €356 billion.
However, a significant portion of that figure was accounted for by loans from the
ECB and other central banks, and IMF/EU-EFSF bailout funds (Figure 1).52 What
remained was €206 billion in private debt (approximately 60 percent of Greek
public debt) to be targeted for restructuring. Out of this €206 billion, €177.3
Kalaitzake 405

Figure 2.  Breakdown of Private Bondholders.

Source: Calculations based on Jones, “Greek Debt Talks Open Pandora’s Box.”55

billion (86 percent) was issued under Greek law; the rest consisted of foreign law
bonds and sovereign-guaranteed bonds. By industry estimates, roughly €135 bil-
lion of overall private bonds were owned by banks and insurance firms, made up
mostly of IIF members or under government regulation and hence most amenable
to a restructuring agreement. The wildcard resided with the remaining €70 billion
worth of bonds in the hands of hedge funds and other independent minority bond-
holders, most of which—approximately €50 billion, or 24 percent of debt held by
investors—was outside the purview of the IIF (Figure 2). In an effort to strengthen
their hands, several hedge funds precommitted to rejecting any offers of
restructuring.53
In overcoming the obstacle of potential holdouts, Greece was highly fortunate in
that the vast majority of its public debt was governed by Greek law. Seizing on that
fact, Greece’s legal adviser, Lee Buchheit, had proposed in 2010 that Greece could
amend the legal terms of its bonds through local legislation, to retrospectively insert
collective action clauses (CACs) that would apply across all holdings of Greek law
bonds.56 If Greece could secure voting from bondholders representing at least 50 per-
cent of the principal debt, and two-thirds of those creditors voted in favor of a restruc-
turing deal (figures that could be met quite easily through IIF member agreement),
then the problem of minority bondholders’ blocking the writedown could be side-
stepped and resolved.57 The Greek Bondholder Act 4050/12 did precisely that and
essentially killed two birds with one stone. First, with the IIF committing to a 90 per-
cent minimum creditor participation rate in order to go ahead with the debt exchange,
the fact that Greek law bonds represented 86 percent of all bond holdings meant that
the 90 percent target would be comfortably reached, with minimal participation in
relation to international law bonds and sovereign-guaranteed bonds. Second, the local
law amendment expedited the restructuring process enormously, and ensured that the
406 Politics & Society 45(3)

bond exchange would occur before the March 20 deadline, when an extremely large
notional value bond (approximately €10 billion) was due to be repaid in full.58 The
remaining 14 percent of non-Greek law bonds were subsequently dealt with on a bond
by bond basis and garnered a 70 percent agreement rate.59 Overall, the total participa-
tion rate involving private bonds was just shy of 97 percent (approximately €200 out
of €206 billion) leaving just €6 billion worth of debt escaping writedown: a phenom-
enally low holdout figure given the scale of the restructuring.
An obvious question arises on the back of the Greek law amendment: if it was pos-
sible to insert CACs through local legislation, why not simply enforce restructuring on
bondholders without negotiation and voluntary participation? The answer is contained
in Buchheit’s original proposal:

A dramatic change in local law by one country might allow a worm of doubt to slip into
the heads of capital market investors in other similarly situated countries, driving up
borrowing costs around the board. The official sector supporters of the debtor country
will presumably balk at any action of this kind that could unleash the forces of contagion
and instability on other countries whose debt stocks also contain predominantly local
law-governed instruments. The more dramatic or confiscatory the effect of the change of
law, the higher the likelihood that it would be subject to a successful legal challenge.60

In short, Greece was setting a precedent for the handling of unsustainable debt that
would be inserted into the calculations of financial investors assessing the debt of
other periphery countries. Cognizant of the balancing-act nature of debt restructuring,
Greece and its Eurozone partners were hugely sensitive about the degree of coercion
they would utilize in order to facilitate a successful writedown. This concern extended
as far as Greece’s actually honoring the payments of holdouts maturing later in 2012,
despite warnings before the restructuring deal that these debts could not be fulfilled.61
Thus, while the Greek law amendment represented a decidedly aggressive element of
coercion to the deal, it would be tempered by counteracting elements of a voluntary
nature.
To this end, the deal was interspersed with a range of inducements and market-
friendly concessions that, in the circumstances of such devalued bonds, added up to a
relatively lenient fallout for private creditors, particularly considering the potential
alternatives.62 The formal deal involved three basic components:

1. An upfront nominal debt reduction of 53.5 percent.

2. A swap of 15 percent of existing claims, for AAA EFSF securities maturing
between one and two years.
3. A swap of the remaining 31.5 percent of bonds for new thirty-year bonds with
incremental coupon payments (2 percent to 2014, 3 percent from 2014 to 2020,
3.65 percent from 2020 to 2021, and 4.3 percent from 2021 until maturity).63

There is no question that the acceptance of this restructuring represented a substantial

loss for creditors. According to independent estimates the deal resulted in a net present
Kalaitzake 407

value loss of around 60 percent, which was on the upper end of writedowns in histori-
cal comparison.64 Nevertheless, the EFSF bond swap—a direct cash-like payout worth
€30 billion and financed by an EU contribution—constituted a sweetener that was
without historical precedent. Considering that this money could potentially have been
used to provide Greece with further debt relief as opposed to buying investor goodwill,
it represented an extraordinary concession to private creditors. Furthermore, the new
thirty-year bonds came with a significant upgrade in legal status: they were issued
under English law and included a range of investor protections not found in previously
held Greek law bonds. Furthermore, the skewed distribution of the coupon value
toward the long end of these new bonds also favored longer-term investors, that is,
predominantly IIF banking members as opposed to non-IIF, short-term hedge fund
holders. Finally, the cofinancing agreement struck between the IIF’s Jean Lemierre
and Lazard representative Michele Lamarche was also agreed to by Eurozone offi-
cials. Greek repayments to bondholders were thus tied with Greek loan repayments to
the EFSF, providing extra safety guarantees for restructured holders. In light of these
concessions and inducements, even a significant portion of non-IIF-affiliated institu-
tions signed up for the debt exchange voluntarily.65 Discounting the coercive activa-
tion of CACs into Greek law bonds, the voluntary participation rate for the entire deal
was 83.5 percent, which signified the active agreement of a substantial number of
potential free-riders.66
The inducements and participation rates outlined demonstrate that the deal was not
voluntary in name only. Furthermore, and especially considering the €30 billion EU
contribution, it demonstrated clearly that inducing creditors and insulating the rest of
the Eurozone from private exposure to Greece was the primary motivation from the
point of view of EU officials, superseding even the ostensible goal of restoring Greek
debt sustainability. Despite the writedown, Greece’s debt trajectory remained precari-
ous, with the second bailout plan envisaging an ambitious structural adjustment target
of a 120 percent debt-to-GDP ratio by 2020—still a worrying level in the eyes of
financial markets. According to investor assessments, Greece’s “economic outlook
remain[s] very uncertain,” as the adjustment program was based on a number of criti-
cal assumptions (e.g., GDP growth, privatization receipts, political stability) that could
not be taken for granted.67 Thus, although the restructuring deal successfully secured
an effective exit from Greece for the vast majority of creditors, a buyback scheme
launched in late 2012 to provide additional debt relief to Greece demonstrated that
Eurozone officials were aware of deficiencies vis-à-vis debt sustainability in the bail-
out program.68 As it transpired, the failure to deal adequately with debt sustainability
was directly implicated in the continuing internal economic and political turmoil of the
Greek state, contributing to the rise of SYRIZA and the necessity of a third bailout deal
in August 2015. At that stage, however, economic circumstances had changed consid-
erably: major European banks were no longer on the hook for significant losses and
Germany could reasonably contemplate a Greek exit from the Eurozone that would
not represent an existential threat to the entire European financial system. Although
the restructuring deal did not definitively solve the Eurozone crisis, it did mark a
408 Politics & Society 45(3)

considerable turning point by effectively cordoning Greece off as a contagion threat to

the European banking system.

Conclusion
This analysis of the IIF’s prominent role in assisting the EU authorities to achieve an
orderly debt restructuring for Greece represents a significant empirical contribution to the
literature on the Eurozone crisis. Furthermore, the article advances our theoretical under-
standing of how financial actors have been able to exercise significant political influence
over important policymaking choices in the postcrisis era. Leveraging in particular the
analysis of Woll, this article has demonstrated that the degree of political organization or
disorganization within the banking sector is a critical factor in its attainment of policy
goals. However, contrary to Woll’s finding of advantageous “collective inaction” at the
national level, the article shows that, at a transnational level of analysis, the ability of the
banks to organize themselves effectively was paramount in their achieving core objec-
tives: convincing the official sector to follow a cooperative path, securing a variety of
generous inducements, sidelining the disruptive activity of hedge funds, and effectively
severing private bank exposures to Greece without triggering major market panic. The IIF
functioned as an indispensable vehicle for this concerted action because of their extensive
technical expertise, their recruitment of highly regarded and experienced debt restructur-
ing negotiators from both the private and the public sector, and their close interrelation-
ship with European policymaking and financial governance networks.
Although the case of the Greek debt restructuring speaks to the considerable power
of a peak financial association such as the IIF, it is important also to recognize the limi-
tations of their involvement and the contingencies of their success. First, the negotiation
of an acceptable writedown depended heavily on the cooperation of European institu-
tions and leading member states. For instance, the use of EFSF securities to provide an
exceptionally large inducement to bondholders would not have been possible had credi-
tors been dealing with the Greek government alone. Second, it is impossible to say what
would have happened if the Greek government had not been able to insert CACs retro-
spectively into outstanding bonds; it was by sheer good fortune that the vast majority of
debt had been issued under Greek law, thus allowing a legal amendment to compel a
minority of creditors into accepting a substantial writedown. Third, although the final
restructuring deal certainly did pave the way for the exit of private creditors from Greek
debt, it is questionable to what extent that was a desirable policy for European eco-
nomic and political stability in the long run. As noted, the final deal did little to make
the Greek debt trajectory sustainable, and thus contributed to a persistent flaring of
Grexit worries and broader Eurozone difficulties to the present day. Furthermore, from
the viewpoint of the official sector, by effectively shifting the exposure of private finan-
cial firms onto the balance sheets of public institutions, the deal further undermined the
democratic legitimacy of the EU in the eyes of the public.
A final important outcome of the case was the adherence to a (broadly) voluntary
and cooperative form of debt restructuring process that helped to maintain the market-
based, contractual IIF Principles as the accepted framework for tackling sovereign
Kalaitzake 409

debt negotiations between debtors, creditors and the official sector. Although the out-
break of the Eurozone crisis has renewed discussion concerning the appropriateness of
a statutory mechanism for resolving future debt crises, public authorities have ulti-
mately rejected such a proposal for the time being. In 2013, the IMF clearly stated that
there is not “sufficient support within the membership . . . to establish such a universal
treaty.”69 However, the conclusion might have been very different if the effort to
resolve the Greek crisis by means of a voluntary restructuring in 2012 had failed and
triggered a European “Lehman-type event” as anticipated by the IIF in the run-up to
the final agreement. Indeed, how to manage future debt restructuring is a critical ongo-
ing point of action for the IIF: since the Greek crisis, the IIF has continued to partici-
pate in discussions with global regulators concerning the implementation of
strengthened contractual measures—so-called aggregated CACs—that would not fun-
damentally alter the market-based code of conduct established by the IIF Principles.70
Private business associations like the IIF are a critical locus of political power and
will demand greater attention as transnational policy difficulties emerge more fre-
quently. As such, it is important to recognize that these associations need not be con-
ceived of simply as crude lobbyists—though they may often function in this
manner—but in terms of their own organizational dilemmas: helping firms to solve
collective action problems by promoting intraindustry consensus, on the one hand, and
on the other, establishing themselves as credible and useful partners in global gover-
nance with policymakers and regulatory agencies.

Acknowledgments
The author wishes to thank Andrew Hindmoor, Stephen Bell, Kathleen Lynch, and Fred Block
for their helpful comments on previous drafts of this article.

Declaration of Conflicting Interests

The author declared no potential conflicts of interest with respect to the research, authorship,
and/or publication of this article.

Funding
The author received no financial support for the research, authorship, and/or publication of this
article.

Notes
  1. Arturo C. Porzecanski, “Behind the Greek Default and Restructuring of 2012,” in Eugenio
A. Bruno, ed., Sovereign Debt and Debt Restructuring: Legal, Financial and Regulatory
Aspects (London: Globe Business Publishing, 2013), 33–49; Nikolaos Zahariadis,
“Complexity, Coupling and Policy Effectiveness: The European Response to the Greek
Sovereign Debt Crisis,” Journal of Public Policy 32, no. 2 (2012): 99–116.
 2. Pepper D. Culpepper, “Structural Power and Political Science in the Post-Crisis Era,”
Business & Politics 17, no. 3 (2015): 391–409; Michael Moran and Anthony Payne,
“Introduction: Neglecting, Rediscovering and Thinking Again about Power in Finance,”
Government & Opposition 49, no. 3 (2014): 331–41; Mike Savage and Karel Williams,
410 Politics & Society 45(3)

“Elites: Remembered in Capitalism and Forgotten by Social Sciences,” Sociological

Review 56, no. 1 (2008): 1–24.
  3. Stefano Pagliari and Kevin L. Young, “Leveraged Interests: Financial Industry Power and
the Role of Private Sector Coalitions,” Review of International Political Economy 21, no.
3 (2014): 575–610; Barbara Sennholz-Weinhardt, “Regulatory Competition as a Social
Fact: Constructing and Contesting the Threat of Hedge Fund Managers’ Relocation from
Britain,” Review of International Political Economy 21, no. 6 (2014): 1240–74; Kevin L.
Young, “Financial Industry Groups’ Adaptation to the Post-Crisis Regulatory Environment:
Changing Approaches to the Policy Cycle,” Regulation & Governance 7, no. 4 (2013): 460
–80; Kevin L. Young, “Transnational Regulatory Capture? An Empirical Examination of
the Transnational Lobbying of the Basel Committee on Banking Supervision,” Review of
International Political Economy 19, no. 4 (2012): 663–88; Ranjit Lall, “From Failure to
Failure: The Politics of International Banking Regulation,” Review of International Political
Economy 19, no. 4 (2012): 609–38; Simon Johnson and James Kwak, 13 Bankers: The Wall
Street Takeover and the Next Financial Meltdown (New York: Pantheon Books, 2010).
  4. Eleni Tsingou, “Club Governance and the Making of Global Financial Rules,” Review of
International Political Economy 22, no. 2 (2015): 225–56; Geoffrey D. Underhill, “The
Emerging Post-Crisis Financial Architecture: The Path-Dependency of Ideational Adverse
Selection,” British Journal of Politics & International Relations 17, no. 3 (2015): 461–
93; Leonard Seabrooke and Eleni Tsingou, “Responding to the Global Credit Crisis: The
Politics of Financial Reform,” British Journal of Politics & International Relations 12, no.
2 (2010): 313–23.
 5. Hans-Jürgen Bieling, “Shattered Expectations: the Defeat of European Ambitions of
Global Financial Reform,” Journal of European Public Policy 21, no. 3 (2014): 346–66;
Thomas Rixen, “Why Reregulation after the Crisis Is Feeble: Shadow Banking, Offshore
Financial Centers, and Jurisdictional Competition,” Regulation & Governance 7, no. 4
(2013): 435–59.
  6. Stephen Bell and Andrew Hindmoor, “Masters of the Universe but Slaves of the Market:
Bankers and the Great Financial Meltdown,” British Journal of Politics & International
Relations 17, no. 1 (2015): 1–22; Stephen Bell and Andrew Hindmoor, Masters of the
Universe, Slaves of the Market (Cambridge, MA: Harvard University Press, 2015).
  7. Stephen Bell, “The Power of Ideas: The Ideational Shaping of the Structural Power of
Business,” International Studies Quarterly 56, no. 4 (2012): 665.
  8. Pepper D. Culpepper and Raphael Reinke, “Structural Power and Bank Bailouts in the
United Kingdom and the United States,” Politics & Society 42, no. 4 (2014): 427–54.
  9. Culpepper, “Structural Power and Political Science in the Post-Crisis Era.”
10. Cornelia Wall, “Politics in the Interest of Capital: A Not-So-Organized Combat,” Politics
& Society 44, no. 3 (2016): 373–91; see also Cornelia Wall, “Bank Rescue Schemes in
Continental Europe: The Power of Collective Inaction,” Government & Opposition 49, no.
3 (2014): 426–51; Cornelia Wall, The Power of Inaction: Bank Bailouts in Comparison
(Ithaca, NY: Cornell University Press, 2014).
11. Cornelia Wall, “A Rejoinder by the Author,” Accounting, Economics & Law: A Convivium
6, no. 1 (2016): 85–92; See also Matthias Thiemann, “The Power of Inaction or Elite
Failure? A Comment on Woll’s ‘The Power of Inaction,’” Accounting, Economics & Law:
A Convivium, no. 1 (2016): 31–45.
12. Tsingou, “Club Governance and the Making of Global Financial Rules.”
13. Mancur Olson, The Logic of Collective Action: Public Goods and the Theory of Groups
(Cambridge, MA: Harvard University Press, 1965).
Kalaitzake 411

14. Paul De Grauwe, “The Political Economy of the Euro,” Annual Review of Political Science
16, no. 1 (2013): 153–70.
15. Ralph Atkins and Kerin Hope, “Eurozone: Halcyon No More,” Financial Times (February
7, 2010).
16. The ECB later adjusted its criteria for collateral to ensure rollover funding for Greek banks.
17. “Instruments of Torture: The EU Steps Up Efforts in Search of a Solution for Greece,”
Spiegel Online International (March 1, 2010); online at: http://www.spiegel.de/interna-
tional/europe/instruments-of-torture-the-eu-steps-up-efforts-in-search-of-a-solution-for-
greece-a-681035.html.
18. Martin Wolf, “A Bail-Out for Greece Is Just the Beginning,” Financial Times (May 5,
2010).
19. International Monetary Fund (IMF), Greece: Ex Post Evaluation of Exceptional Access
under the 2010 Stand-By Arrangement (Washington, DC: IMF, 2013), 34.
20. Ibid., 33.
21. Ibid., 29.
22. Ibid., 27.
23. Ibid.
24. Stacy-Marie Ishmael, “RBS on Central Banks’ Underwater EUR Positions,” Financial
Times (May 25, 2010).
25. IMF, Greece: Ex Post Evaluation, 28.
26. Jean Claude Trichet interview with Wolfgang Proissl, Financial Times Deutschland (July 14,
2011); online at: https://www.ecb.europa.eu/press/key/date/2011/html/sp110718.en.html.
27. Desmond Lachmann, “Partial Debt Restructuring Will Not Work,” Financial Times (May
30, 2011).
28. Lorenzo Bini Smaghi, “Monetary and Financial Stability in the Euro Area” (Speech, May
10, 2011); online at: http://www.ecb.europa.eu/press/key/date/2011/html/sp110510_1.
en.html.
29. Steven Erlanger and Rachel Donadio, “Beyond Greece, Europe Fears Financial Contagion
in Italy and Spain,” New York Times (July 19, 2011).
30. Eurostat, General Government Gross Debt—Consolidated; Sam Jones, “Greek Debt Talks
Open Pandora’s Box,” Financial Times (January 18, 2012).
31. IMF, Greece: Ex Post Evaluation, 28–33.
32. Throughout this “holding period,” hedge funds became substantial owners of distressed
sovereign bonds that were delivering yields much higher than average market returns—
exactly the kind of market opportunity on which hedge funds thrive. By contrast, the strat-
egy of banks to wind down their exposure highlights the conflicting interests of different
market participants.
33. “Beware of Falling Masonry,” Economist (November 26, 2011).
34. Institute of International Finance (IIF), Response to the Global Financial Crisis: 2007–
2012 (Washington, DC: IIF, 2012), 219–16.
35. Institute of International Finance, The First 25 Years, 1982–2007 (Washington, DC: IIF,
2007), 2–4.
36. Abraham Newman and Elliot Posner, “Structuring Transnational Interests: The Second-
Order Effects of Soft Law in the Politics of Global Finance,” Review of International
Political Economy 23, no. 5 (2016): 768–98.
37. Raymond Ritter, “Transnational Governance in Global Finance: The Principles for Stable
Capital Flows and Fair Debt Restructuring in Emerging Markets,” ECB Occasional Paper
103 (Frankfurt: European Central Bank, April 2009).
412 Politics & Society 45(3)

38. IIF, Report of the Principles Consultative Group on 2011 Implementation of the Principles
for Stable Capital Flows and Fair Debt Restructuring (Washington, DC: IIF, September
2011), 9.
39. IIF, Report of the Principles Consultative Group on 2012 Implementation of the Principles
for Stable Capital Flows and Fair Debt Restructuring (Washington, DC: IIF, October
2012), 10; online at: https://www.iif.com/file/4199/download?token=yf_eMmyZ.
40. Patrick Jenkins and Megan Murphy, “Schäuble Presses Case for Bond Swap,” Financial
Times (July 6, 2011).
41. IMF, “Greece: Fourth Review,” IMF Country Report No. 11/175 (Washington DC: IMF,
2011), 27.
42. European Council, “Statement by the Heads of State or Government of the Euro Area
and EU Institutions” (July 21, 2011); online at: http://www.consilium.europa.eu/uedocs/
cms_data/docs/pressdata/en/ec/123978.pdf.
43. IIF, Response to the Global Financial Crisis: 2007–2012, 44.
44. Landon Thomas and Stephen Castle, “The Denials That Trapped Greece,” New York Times
(November 5, 2011).
45. John O’Donnell and Lionel Laurent, “EU Warned of Credit Crunch Threat, French Banks
Hit,” Reuters (September 14, 2011).
46. International Monetary Fund, Global Financial Stability Report, September 2011:
Grappling with Crisis Legacies (Washington, DC: International Monetary Fund, 2011), 44.
47. Helena Smith, “How Greece Pulled back from the Brink of Plunging Europe into Chaos,”
Guardian (May 22, 2014).
48. Peter Spiegel and James Mackintosh, “Fund Threatens to Sue over Greek Bond Losses,”
Financial Times (December 21, 2011).
49. Anne-Sylvaine Chassany and Jesse Westbrook, “A Lazard Banker Is the Greeks Financial
Goddess,” Bloomberg Businessweek (April 19, 2012).
50. Hans Humes interviewed by Kai Ryssdal for Marketplace (February 21, 2012); online at:
https://www.marketplace.org/2012/02/21/world/greek-debt-crisis/greek-bond-investors-
take-big-haircut-bailout-deal.
51. Ibid.
52. ECB holdings of Greek bonds were excluded from negotiations, appeasing the Bank’s
reservations about the restructuring process.
53. Jones, “Greek Debt Talks Open Pandora’s Box.”
54. Credit Suisse, “Greece’s Debt Exchange,” Fixed Income Research (Zurich: Credit Suisse,
February 27, 2012).
55. Sam Jones, “Greek Debt Talks Open Pandora’s Box.”
56. Lee Buchheit and Mitu Gulati, “How to Restructure Greek Debt” (working paper, Duke
University Law School, May 7, 2010); online at: http://papers.ssrn.com/sol3/papers.
cfm?abstract_id=1603304. The authors referred to this as a “mopping up law” that would
bind any dissident minority to the decision of the majority.
57. Credit Suisse, “Greece’s Debt Exchange,” 4–5.
58. Ibid., 36.
59. IIF, Response to the Global Financial Crisis: 2007–2012, 47.
60. Buchheit and Gulati, “How to Restructure Greek Debt,” 11.
61. In the event, Greece continued to repay holdouts in an effort to avoid legal challenges and
uphold the impression of voluntary participation.
62. Nouriel Roubini, “Greece’s Private Creditors Are the Lucky Ones,” Financial Times (May
7, 2012). Also, in a final bid to round up the participation of all creditors, a leaked IIF memo
Kalaitzake 413

warned of the catastrophic consequences of a disorderly default: a European Lehman-style

event that would cost more than €1 trillion in the fallout and wreak havoc on the European
financial system. For details see David Oakley, “IIF Warns on €1Tn Cost of Greek Euro
Exit,” Financial Times (March 6, 2012).
63. IIF, Report of the Principles Consultative Group on 2012 Implementation of the Principles
for Stable Capital Flows and Fair Debt Restructuring, 13.
64. Jeromin Zettelmeyer, Christoph Trebesch, and Mitu Gulati, “The Greek Debt Restructuring:
An Autopsy,” Economic Policy 28, no. 75 (2013): 513–63.
65. Ibid. for full technical details on inducements and concessions.
66. IIF, Response to the Global Financial Crisis: 2007–2012, 47–48.
67. Morgan Stanley, “On the Greek Debt Restructuring,” Morgan Stanley Research Europe,
February (2012): 3–4; online at: https://www.investireoggi.it/forums/attachments/
greecerestructuringparti-pdf.149429/.
68. This involved a stretching out of maturities to ease Greek payment schedules, an easier
plan for core governments to sell to their domestic audience.
69. IMF, Sovereign Debt Restructuring—Recent Developments and Implications for the Fund’s
Legal and Policy Framework (Washington, DC: IMF, 2013), 29.
70. IIF, Principles for Stable Capital Flows and Fair Debt Restructuring: Report on
Implementation by the Principles Consultative Group (Washington, DC: IIF, October
2015), 8–9; online at: https://www.iif.com/file/13103/download?token=ExIBNRKm.

Author Biography
Manolis Kalaitzake ([email protected]) is a postdoctoral research fellow for the
Horizon 2020 project SOLIDUS: “Solidarity in European Societies: Empowerment, Social
Justice and Citizenship,” at the Equality Studies Center, University College Dublin. His research
examines the interplay between finance and governments, with a particular focus on the
European Union, and drawing on insights from sociology, political science, and international
political economy.