How the Greek debt reorganisation of 2012 changed ... - Allen & Overy

22 How the Greek debt reorganisation of 2012 changed the rules of sovereign insolvency – September 2012
majority of bondholders to override a minority
by voting – as indeed Greece did.
The fact that Greece did change the bonds by
inserting collective action clauses forcibly
brought to the attention of the international
creditor community the overriding importance
of a foreign governing law as insulating the
bond obligations from unilateral interference by
a local statute. It was at once appreciated that it
was dangerous to have a situation where the
debtor could, of its own volition, completely
change its debt obligations just by passing a
law.
Why were the bonds governed by
English law?
If Greece did insist on Greek law for the new
bonds, the market might have taken this as a
signal that Greece intended to reserve an
option to change the obligations unilaterally
and hence bondholders would not be willing to
participate. The success of the project would be
jeopardised, risking further contagion.
Probably all of the official loans in the current
eurozone crisis have been subject to an external
system of law, usually English law. The relevant
bonds issued by the EFSF and the European
Union were governed by an external system of
law. The German public sector entity
Kreditanstalt für Wiederaufbau used English
law in the Greek context.
English law is like a public utility. It is generally
familiar to financial markets and acceptable to
them. In addition, English law is an EU system
of law. The use of an EU governing law was
therefore an EU solution.
Some of the existing Greek debt was governed
by a foreign law. It may have been unfair to
switch those bondholders to Greek law.
A market perception that the new Greek bonds
had an inherent weakness would not have
assisted the Greek domestic banking system in
returning to the markets and ending its
dependence on the ECB for liquidity, a major
aim of the official sector Greek rescue
programme.
© Allen & Overy LLP 2012
The new bonds would contain collective action
clauses which were fully consistent with current
EU thinking. Hence, if Greece wished to put
some new proposal to the bondholders in the
future, there was a mechanism for bondholder
voting on the proposal whereby the vote of the
prescribed majorities would bind minority and
hold-out creditors. Greece had not lost
complete sovereignty.
There were fears that the use of English
governing law for the documents governing the
Greek debt reorganisation could disturb the
existing practice whereby public debt of
eurozone member states is often governed by
domestic law, but these proved unfounded.
For various reasons, it was not considered
appropriate to use the law of a eurozone state
instead of English law. The UK is a member of
the EU but not the eurozone. These reasons
were technical legal reasons. They included the
fact that nearly all eurozone states either did
not recognise the trust (which was an important
feature of the initial structure negotiated in July
2011) or had adverse case law on an obscure
but important article of the IMF agreement.
Article VIII 2b provides for the universal
recognition of the exchange controls of a
member state, thereby overriding the insulation
of the governing law if strictly applied, which it
is not in some countries such as the UK and
the US.
The application of public international law was
not considered appropriate. This is because the
contract rules of public international law are
nowhere near the sophistication of domestic
contract law and because the issue of whether
public international law insulates against debtor
redenominations, moratoriums and exchange
controls appears unclear.
It was not considered possible to protect
creditors by a provision that the governing law
was Greek law frozen as at some date in 2011.
A stabilisation clause freezing the governing law
in this way is not considered an inviolable
protection.