It seems one cannot live without lawyers. As anxiety over the legality of the Greek Private Sector Involvement (PSI) deal was abating, Cyprus Popular Bank (Laiki) filed an investment arbitration claim at the International Centre for the Settlement of Investment Disputes (ICSID) against Greece, claiming billions of euros in compensation for losses suffered in the 2012 Greek bond haircut. Laiki is a known enthusiast for Investor State Dispute Settlement (ISDS) and is involved in another action against Greece, this time for the provision (or lack thereof) of Emergency Liquidity Assistance (ELA) to its Greek subsidiaries during the events of 2012 that led to the resolution of Cyprus’ two biggest banks.
The PSI deal, forming the core of this action, has been a key component of the Greek Bailouts and is equally blamed and celebrated for moving the burden of any potential sovereign default from private hands onto public coffers. The PSI deal worked by offering to swap in early 2012 Greek bonds with new ones of a lesser value, a reduction of 53.5%. Why would anyone, however, voluntarily agree to accept such a significant haircut? Bondholders were offered this choice after Greece enacted retrospective legislation inserting what are known as Collective Action Clauses (CACs) in the bond contracts. Such clauses provide that if the majority of bondholders in any given bond issue vote in favour of accepting the offer, then all bondholders are obligated to participate. CACs in other words make bonds similar to shares in corporations: if the majority of shareholders vote for a resolution, an objecting minority cannot block it. A significant number of bondholders roped into this deal through the operation of CACs sought legal redress arguing that their investments had been forcefully expropriated.
One group protesting the PSI haircut consisted of 7000 small-holders, who joined a class suit against Greece arguing expropriation under the Greek Constitution and violations of Human Rights provisions under the European Convention of Human Rights. These arguments were tested in the Greek Council of State in March 2013. The court found for the Greek government arguing that losses were due to the activation of CACs, not by the state act that retrospectively inserted the CACs and found no violations of Article 1 of the Protocol to the ECHR.
A second challenge to the PSI came at ICSID from a Slovakian bank. Poštová Banka and it Cypriot subsidiary Istrokapital argued that, under the Greece-Slovak Republic and the Cyprus-Greece bilateral investment treaties, they were entitled to compensation for losses they suffered due to the PSI, amounting roughly to half the invested amount of €504m. The Poštová claim was the first challenge under Bilateral Investment Treaties (BITs) and is similar to the new case brought on behalf of Laiki. The objective of an investment treaty, Poštová argued, was for the signatories to create favourable conditions for investments. As the Treaty offered standards of protection and a mechanism for dispute resolution when those standards were violated, ICSID was the appropriate forum to discuss any claims arising out of PSI. BITs are aimed at encouraging foreign investment and for that reason make a series of binding promises to investors. They may, as a result, offer a more varied menu of options to someone wishing to sue, than mere reliance on domestic constitutional and human rights provisions. ISDS clauses in BITs have faced criticism for offering a parallel legal system that exists beyond the reach of domestic courts. Concerns has been especially pronounced in the context of the Transatlantic Trade and Investment Partnership (TTIP) negotiations. Greece prevailed at ICSID as the Tribunal found that for a variety of technical reasons it did not have jurisdiction to hear the Poštová claim. This finding ended the process without an examination of the substantive claims.
Is the Greek PSI deal in danger after this latest challenge? The short answer is yes. It is unlikely that the advisors of Laiki would have brought a claim if they thought that their client will have the same difficulty on jurisdictional grounds that led to failure in Poštová. While Greece won two challenges on the PSI, one in domestic courts and one in ICSID, the Argentine precedent is not a good omen. The Abaclat case, where a number of Italian bondholders sued Argentina, is illustrative of the sort of action that is becoming more common in the Greek context. While the case is still pending, we have a decision on jurisdiction accepting that the claim comes within BIT provisions and can proceed for consideration on the substantive grounds. Is this the sort of answer one should expect in the new case against Greece? Poštová lost on jurisdiction because of the exact wording of the BIT it was relying on. Investors from one of the other states Greece holds BITs with may have better luck. Bondholder BIT arbitrations remain a danger for Greece.