I fought the Law and the Law won, till now

This post first appeared on the new SLSA Blog, it is reproduced here in full:
As the troubles of Deutsche Bank remind us of the heady days leading to the collapse of Lehman, we have a good opportunity to reflect on financial rescues and resistance to the austerity that resulted, at least in Europe. While on the systemic level resistance to bailouts, and rescues with their associated conditionality may sound counter-intuitive (if there had been no rescues our economies and lives would look very different now), there is significant impetus to resist on the personal level.
A pensioner who as suffered repeated reductions in payments due to financial consolidation mandated by rescue conditionality; a judge who has seen incomes slashed; employees made redundant; depositors bailed-in; investors subject to haircuts; and many more have strong personal incentives to resist. Add to these financial market players who object to QE and ECB “helicopter money” and you have a strong constituency for action, despite the fact that no one would have preferred policy makers to let the market ‘creatively destroy’ itself in a Europe-wide experiment in Schumpeter’s gale.
The obvious vehicle for resistance is the law. How can the law then be used to protect personal interests in a hope to reverse austerity, or at least protest in individual cases?
The first question to ask is what to complain about?
Rescue programmes, usually in the form of MoUs between European institutions and countries in difficulty have required fiscal discipline and the reduction of budget deficits, including action on state debt levels. This led to what is widely perceived as a one-size-fits-all austerity recipe imposed on countries receiving assistance (Ireland, Portugal, Cyprus, Greece). The consequence of the implementation of these MoUs has been an uneasy mix with domestic legal provisions. In a number of cases, mandated measures have been judged unconstitutional, especially when they involved lay-offs, changes to labour laws and reductions in salaries, or increases in pension contributions. Claimants have sought to invalidate these decisions both in their implementation phase (in national courts) and at their origin (in European courts). Other claims are directed to the European Court of Human Rights in Strasbourg.
Many cases have been about violations of property rights. For example as a result of the Cypriot bailout, the islands two main banks  had to be restructured. The terms of the rescue required a bail-in of investors and depositors during the re-organisation. Those who saw part of their investment disappear have complained about deprivation of possession in national and European courts. In Greece too have expropriation type claims surfaced, mostly centered on losses incurred during Greece’s debt haircut, another instance of bailout mandated cuts. Claimants in this case have taken their arguments both to national courts and international investment tribunals.
The second question is who to complain about?
Here things get more problematic. The structure of Eurozone rescue programmes had European institutions negotiate with member states agreements, which were then signed and monitored by consortia involving, or led by, international institutions (like the IMF and the ESM). The problem with this arrangement is that while one can sue their government in national courts, European institutions in European Courts, and both in human rights courts, it is more difficult to challenge the actions of international institutions. A technical jurisdictional barrier therefore has served to shield the administrators of bailouts and MoUs from the bulk of claimants. This all however recently changed.
Something’s different
The European Court of Justice recently offered judgment on a case involving Cypriot claimants against European Union institutions for losses suffered due to the forced bank restructure mentioned earlier. Because actions related to the Cyprus bailout were handled by the ESM, so far there was an irremovable jurisdictional barrier to anyone who wanted to complain in a legal action about the involvement of the EU. The ECJ, for the first time however said that the tasks allocated to the Commission by the ESM Treaty oblige it to ensure that MoUs concluded by the ESM are consistent with EU law. The consequence is that the European Commission should refrain from signing MoUs whose consistency with EU law is in doubt. Suddenly the jurisdictional barrier disappeared.
Shall everyone run to the courts then?
Not quite yet. The court did not decide that the Cypriot MoU was illegal and ordered no compensation for Cypriot investors. The measures taken in Cyprus were judged as necessary and proportionate in the circumstances. Nonetheless, recent jurisprudence is significant as it breaks down the barrier between European institutions and international-treaty based structures that have sprang up to deal with the needs of euro-area crisis response. This opens the door to legal challenges to the bailout programmes of the EFSF/ESM offering an avenue to a plethora of claimants to unpick the questionable legal underpinnings of conditionality and austerity policies. There are a lot more claims challenging austerity and its consequences over and beyond property deprivation. Lawyers all over the European South are open for business.

CJEU opens door to legal challenges to Euro-rescues in key decision


A key reason for the inability of claimants to successfully challenge programme conditionality and the resulting austerity inherent in euro-area rescue deals, has been the barrier between the actions of EU institutions and the international bodies that carried out the bailouts. The recent decision of the CJEU in Ledra Advertising breaks down that barrier with unpredictable consequences.

Full case-note is available here, email i.glinavos@westminster.ac.uk for comments



Laiki strikes again. Second PSI challenge faces Greece at ICSID


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.


Greece’s second Cyprus moment: A national disaster in the making

Picture 4.png Dimitrios Ioannidis

The last national disaster Greece has experienced was the Turkish invasion of Cyprus in the summer of 1974. This invasion was precipitated by the Greek junta’s decision to attempt a coup and remove Makarios as the head of state of Cyprus. Turkey saw this move as the opportunity it was looking for to re-draw the map in Cyprus. The result was a 4 decade conflict and stalemate on this small and tortured island in Eastern Mediterranean.

The junta’s actions in Cyprus over the first 6 months of 1974 were motivated by calculation, fanaticism and crucially stupidity. I am not suggesting for a second that Syriza is not a legitimate government in 2015 in Greece. What I am suggesting though is that it is displaying at the moment the same calculation, fanaticism and stupidity that leads to fatal errors. Syriza’s errors are also likely to result in 40 years of struggle.

As I have often stressed, this is a home-made, a chosen crisis. I do not believe in conspiracy theories and I do not think that Varoufakis and Tsakalotos (resoundingly pro-European) had a Grexit plan up their sleeves all along. They have nonetheless proved themselves incompetent, devious, and fanatical. They have created a situation where rupture is not only an option but a fact. I am focusing on Varoufakis and Tsakalotos as I know them through their academic work. Syriza always contained Grexit lovers, like Lapavitsas and outlandish fanatics like Kostantopoulou. I blame Varoufakis (primarily) for giving space for the fanatics to take over the government.

Syriza negotiated in bad faith since February, missed chances to achieve a decent deal, squandered the good-will of all partners. Syriza backed itself into a corner and when faced with the choice between a bad-deal that cost it its support, or a deal that kept the country in the Euro (inevitably bad due to prior mistakes and creditor hard-lines) it chose the former.

Syriza left the economy stagnate and die for 5 months and then pulled the trigger on what was left by losing us ECB support, letting the programme expire without agreement, making defaults on debt inevitable and finally (but crucially) imposing capital controls to keep the zombie-like banking system shuffling forward. This is a crisis of their choosing and their making.

A series of mistakes, miscalculations, wilful blindness and fanatical ideology have created another Cyprus moment. Another national crisis that if not resolved immediately, will last for another 40 years. Syriza needs to stop prying the country’s fingers off the edge of the cliff. Syriza needs to resign now, swap this despicable, devious referendum for an election so the people can properly make a real choice as to the sort of future they want.

Please note that I am not advocating a pro-Euro coup d’etat. I am advocating an election so the Greeks can make their Euro or Drachma choice (with all that this entails). If they choose Drachma, we will find a way to make it work, even though I do not support this choice.

Tsipras does not need to go down in Greek history as another Ioannides.



Επιστροφή στο γύψο: Greek Capital Controls

What Would Greek Capital Controls Look Like?

What is the Greek endgame going to look like? The following from Bloomberg looks at capital controls.


Without a bailout deal sometime soon, Greece could face years of restrictions on what its citizens do with their money.

by Nikos Chrysoloras, June 1, 2015

The four-month standoff between Greece and its creditors over the terms of the country’s bailout has taken a toll on its lenders. With savers withdrawing bank deposits at a record pace and lenders relying on more than 80 billion euros ($88 billion) of Emergency Liquidity Assistance to survive, the European Central Bank’s continued help is key to Greek lenders. If the ECB’s Governing Council were to restrict ELA operations, Greece might have to impose capital controls — essentially capping the amount of money people can access from banks.

Capital controls would have to be put in place by the government, and Greece has said it has no plans for such restrictions. Deutsche Bank last week gave a 40 percent chance of such measures being implemented.

Here are some answers to frequently asked questions, based on conversations with economists and analysts:

How would capital controls work?

They would hurt.

No one knows the specifics for Greece, but here’s what happened in Cyprus: ATM withdrawals were capped at 300 euros a person per day. Transfers of more than 5,000 euros abroad were subject to approval by a special committee. Companies needed documents for each payment order, with approvals for over 200,000 euros determined by available liquidity. Parents couldn’t send children studying abroad more than 5,000 euros a quarter. Cypriots traveling abroad could carry no more than 1,000 euros with them. Termination of fixed-term deposits was prohibited, while payments with credit and debit cards were capped at 5,000 euros. Checks couldn’t be cashed.

How would capital controls be put in place?

An element of surprise helps. Capital controls in Cyprus started with the imposition of a long bank holiday, between March 16 and March 28, 2013. The holiday gave the country time to negotiate an accord with euro-area member states and the International Monetary Fund. Banks re-opened with restrictions in place and a recapitalization plan for the country’s financial system, which included the imposition of losses on deposits.

How long can capital controls be in effect?

There’s no real limit. Cyprus kept controls in place for two years, even though they were supposed to be a temporary emergency measure. Limits on transactions gradually eased over the two-year period, before being lifted completelyin April 2015. Experience from other countries, including Iceland, shows that once in place, they can only be lifted gradually, after a long period of time. Iceland’s government is expected to present a bill this week to lift capital controls implemented in 2008.

What other impact would they have in Greece?

They would buy time. If imposed, they may give Greece breathing space to strike a deal with creditors over a bank holiday, albeit at a huge cost. The limit on corporate transactions and deposit withdrawals would hurt retail sales, tourism, industry, imports and virtually every other sector of economic activity.

What could trigger capital controls?

Much of the collateral that Greek banks have pledged against ELA is government-guaranteed bonds, and Greek sovereign notes, including treasury bills. A missed debt payment, or a breakdown in bailout talks, would probably lead euro-area central bank governors to conclude that these guarantees are no longer eligible for emergency cash, as the guarantor is not solvent. Alternatively, the ECB could impose a very high discount on the face value of Greek collateral, thus setting a hard cap on maximum potential ELA.
What happens following a missed payment?

Governors would probably give Greece a very short deadline to strike a deal with creditors and restore its solvency, and hence the solvency of its banks, like they did in Cyprus. Alternatively, the ECB’s Governing Council could decide to discontinue ELA immediately, thus forcing the immediate imposition of a prolonged bank holiday and capital controls.

Would Greece have other options?

Not really. The government could let the ELA limit be exhausted, in which case there would be no money left in the Greek financial system after a few days, with savers rushing to withdraw as much cash as they can, while they still can. A complete exhaustion of ELA would push Greece out of the euro area, as no economy can function without liquidity. Even if the government plans to leave the currency bloc, capital controls would still make sense, as they would freeze time until it manages to print a new currency, or a currency equivalent.

Are capital controls legal?

In very rare cases. While the free movement of capital is one of the “four basic freedoms” of the European Union, restrictions are possible under “strict conditions on grounds of public policy or public security.” The European Commission allowed Cyprus to do it, in the only instance on record, saying there was significant risk “of complete destabilization of the financial system.”

From Bloomberg


ELA dispute comes to ICSID: Laiki vs Greece

Cyprus Popular Bank Public Co. Ltd. v. Hellenic Republic (ICSID Case No. ARB/14/16)


This blog has often discussed the ECB’s actions in relation to Greek ELA and ISDS. Here is a case that brings the two together.

Laiki Bank (Cyprus Popular Bank in English) has appealed to the International Centre for Settlement of Investment Disputes (ICSID) against Greece over its exclusion from emergency liquidity assistance (ELA) in the neighbouring country. Laiki Bank claims to have incurred heavy losses because Greece excluded it from accessing ELA unlike other Greek banks during the crisis of 2012. Laiki was wound down according to the terms of Cyprus’ €10 billion bailout. Not being able to access ELA for its Greek branches, Laiki relied on the Bank of Cyprus. Some €9 billion in ELA that Laiki (the parent company in Cyprus)  drew in 2012 were returned to Bank of Cyprus. Reports said over half of that was used to finance the lender’s Greek operations.

Laiki had appointed SKADDEN, ARPS, SLATE, MEAGHER & FLOM (UK) LLP to submit a notice of dispute to the Greek Government on 21 November 2012 arguing that on the basis of the Greece-Cyprus BIT, its Greek banking operations ought to receive equal treatment to other Greek banks, and be allowed to access ELA via the Bank of Greece. It claims to have suffered significant losses as a result. Failing a satisfactory response from the Greek side, Laiki commenced proceedings at ICSID on 16 July 2014.

The claimant is represented by Joseph Hage Aaronson (London, U.K.) and Markides, Markides & Co, (Nicosia, Cyprus). Greece is represented by Cleary Gottlieb Steen & Hamilton, who also represent the respondent in Poštová banka, a.s. and ISTROKAPITAL SE v. Hellenic Republic (ICSID Case No. ARB/13/8). For commentary on the latter case click here.

The appointed arbitrators are Juan FERNÁNDEZ-ARMESTO, Philippe SANDS and Giorgio SACERDOTI.

This is bound to be an interesting case, so keep coming back for updates.