TY - JOUR AU1 - Manuelides,, Yannis AB - Key points Three key legacies of the Greek sovereign debt restructuring were (a) the use of the ‘local law advantage’ to retrofit single-limb collective action clauses (CACs) in the Greek law governed bonds, (b) the strategy of the private foreign law governed bondholders to use the per-series CACs to hold out from the restructuring and (c) the exemption of the official sector bondholders from the restructuring. The introduction of the double-limb eurozone CACs coupled with the European Central Bank's declaration (in the context of the Gauweiler litigation) that it will vote against any restructuring of eurozone sovereign bonds, have shown the persistence of the latter two legacies of the Greek restructuring. They have also raised the possibility that a eurozone country, named Arcadia in this article, which loses market access today and in need of restructuring its debt could only do so through the use of the first legacy, the ‘local law advantage’. The article assumes that the use of the ‘local law advantage’ is an option open to Arcadia alongside the use of the official eurozone CACs and considers other possible challenges to the ‘local law advantage’ and in particular challenges based on the European Convention of Human Rights by reference to the Mamatas judgment. In doing so, it continues a discussion started by Buchheit and Gulati (Use of the Local Law Advantage in the Restructuring of European Sovereign Bonds) and Weidemaier [Restructuring Italian (or Other Euro Area) Debt: Do Euro CACs Constrain or Expand the Options?] who proposes that the Mamatas principles can provide guidance for the use of the ‘local law advantage’ both in the context of the eurozone crisis, and also more broadly in the discussion on the limits of the exercise of sovereign discretion. When Greece lost market access in May 2010 and had to seek the assistance of the IMF and its European Union partners, neither the eurozone nor the European Union more broadly had any tools at hand to deal with the crisis. As Greece received its initial assistance package of loans from the IMF and the other eurozone Member States,1 the European Union and the eurozone scrambled to create institutions and legal tools, which could provide solutions to the spreading eurozone crisis of the time. In May 2010, the European Union established the European Financial Stabilisation Mechanism (EFSM) so that the European Commission could provide financial assistance to EU countries having financial difficulties by ultimately utilizing the budget of the European Union.2 Using the EFSM and hence the budget of the whole of the European Union to which both eurozone and non-eurozone members had contributed was politically less acceptable to the latter members. Therefore, in June 2010, the eurozone established the European Financial Stability Facility (EFSF), a private law entity capable of providing loans to distressed eurozone Member States. October 2010 saw the establishment, through a new treaty, of the European Stability Mechanism (ESM), a new public international law entity with a greater range of aims and financial power than the EFSF followed.3 In addition to establishing organizations with the ability to provide financial support to eurozone members who had lost market access, eurozone ministers determined in November 2010 that future bond issues by eurozone sovereigns should include collective action clauses (CACs).4 The legal obligation to include such clauses for all new issues from 1 January 2013 was included in Article 12(3) of the ESM Treaty. Whilst the European Union and the eurozone were developing their various defences against the wider crisis, Greece was busy resolving its own. The legacies of the Greek crisis and of its resolution are many,5 but, for the purposes of this article, I will focus on three. First, Greece was able to restructure the bulk of its domestic law debt using a species of its legislative sovereignty referred to as the ‘local law advantage’. This is the ability of any sovereign, as creator of its own laws, to change the laws that govern its own statutory and contractual obligations. In other words, a sovereign has the unique ability to change the rules governing its own commitments, to the extent these commitments are governed by its own law. Legislative sovereignty invariably affects existing property positions and contracts, most commonly through changes in the tax regime. These changes may be politically welcomed or resented, but, unless they are retrospective or change on-going commitments of the sovereign, they are not legally problematic. Sovereignty is nothing if it is not also legislative sovereignty with the ability of the sovereign to create new laws and through these laws exercise power prospectively. The retrospective use of legislative sovereignty is, however, more problematic, not only politically, but also legally. One does not need to delve into any esoteric chapter of jurisprudence to know that the keeping of promises is fundamental to the rule of law. Retrospective changes challenge the very integrity of a rule-of-law system and any such system should only tolerate retrospective changes of obligations arising out of these promises in the most extreme of circumstances, if it wants to be a rule-of-law system worthy of the name.6 Foreign courts do not generally challenge the legality of a sovereign’s retrospective changes. The ‘local law’ is an ‘advantage’ partly because, if a sovereign chooses to change the terms of its own contracts governed by its own domestic law, these changes will, subject to limited public policy exceptions, be recognized by the courts of other sovereigns. This, at least, has been and remains the position under English law.7 On the other hand, these changes will, in rule-of-law systems, be subject to judicial challenge by reference to (a) the sovereign’s own domestic laws (principally constitutional provisions safeguarding the rights to property and the enforcement of contracts) or (b) international conventions binding on the sovereign (such as in the case of Greece, the European Convention of Human Rights and any bilateral investment treaties). The hurdle for anyone challenging the changes will be high: not only must a plaintiff show that the changes cannot be justified by reference to some general power of the sovereign, but a successful plaintiff must also be able to enforce its claims. The acceptance of the changes by the courts of other sovereigns on the one hand, and the difficulties in establishing rights and enforcing them domestically on the other are at the core of the ‘local law advantage’. Using the ‘local law advantage’ is not to be done lightly. If used, the level of distrust externally will be high and non-domestic counterparties will only be willing to contract under an insulating external law. Internally, the use of the ‘local law advantage’ must be capable of being justified politically and legitimized in the context of the sovereign's civil society. Even if not capable of judicial challenge, such an exercise of legislative sovereignty may very well be an advantage which can only be used once. If the grounds for using it, the means deployed and the purpose for which it was utilized are not generally accepted as justified, measured and reasonable, it is unlikely that the sovereign will continue to be able to use this advantage. Foreign (and perhaps even domestic) creditors will seek the security of an insulating foreign law. Domestically, an unjustified exercise of this power is very likely to give rise to political challenges.8 The Greek debt restructuring of 2012 was possible because of the ‘local law advantage’. It is widely assumed that Greece used the ‘local law advantage’ simply by introducing a law with retroactive effects on its own contractual obligations under its bonds. The truth is that Greece used the ‘local law advantage’ in a much milder way. Greece did not start with a unilateral change in the law. Instead, it asked the holders of Greek law bonds two questions: were bondholders in favour of CACs, treating all their bonds as one voting class regardless of their time of issue, being retrofitted by the operation of Greek law in their bonds?; and were they in favour of a proposed bond restructuring being effected through the application of these retrofitted CACs? Although Greece could, by invoking the ‘local law advantage’, simply retrofit the CACs by enacting a law, and therefore by-pass the first question, it chose instead to carry out this novel consent solicitation across all series of Greek law bonds for the change of their terms. Greece stated that if, on the basis of 50 per cent quorum and a two-thirds majority, consent were granted, then CACs would be retrofitted by the operation of law and the same consent would be counted towards the exchange offer, ie towards approving the second of the above questions. Not only did Greece choose to implement the ‘local law advantage’ conservatively, but the retrofitting was also consistent with the manner in which Germany had sought to change the terms of its corporate bonds under the 2009 Debt Securities Act.9 In brief, the Debt Securities Act introduced per series CACs in bonds governed by German law, but also allowed for the possibility that existing bonds could be retrofitted with CACs, thereby depriving individual bondholders of their existing contractual right to hold out if the issuer and a 75 per cent majority of voting bondholders agreed to the retrofitting. Greece faced challenges for this particular use of legislative sovereignty to retrofit CACs in three fora. A challenge before the Greek courts was based on the argument that the government breached the Greek constitutional protections of property and contracts. A challenge before the arbitral tribunals was based on Greece’s obligations under bilateral investment treaties. Finally, a challenge before the European Court of Human Rights (ECHR) was based on the protection which the European Convention of Human Rights accords to property rights. Ultimately, all challenges were unsuccessful. The domestic challenge failed because the Greek constitution states that property rights ‘may not be exercised contrary to the public interest’10 and mandates the state to ‘plan and coordinate economic activity’ ‘in order to consolidate social peace and protect the general interest’.11 The investment treaty arbitration failed on procedural grounds. Finally, the challenge before the ECHR failed for reasons that will be discussed later in this article. Secondly, the Greek restructuring showed the weakness of trying to restructure debt by relying on CACs on a per series basis. English law bonds issued by Greece had their own CACs. As they were not governed by Greek law, the local law advantage was not available and so the exchange offer had to be approved by the bondholders of each of the separate series of these bonds. The results were mixed. In total, less than 50 per cent by value of the English law bonds issued by Greece were restructured with the exchange offer failing in over half of them. Determined holdout investors had bought a sufficient number of bonds in each of these series so as to ensure that the offer would not be accepted. This raised the spectre of unsuccessful restructurings conducted on a series by series exchange offers and provided a further argument for the introduction of single-limb aggregated CACs, ie CACs which, like the retrofitted Greek law ones, allow for bonds which contain them to vote as a single class across and regardless of their series.12 Thirdly, the Greek restructuring showed that the participation of official sector creditors in a restructuring should not be taken for granted. About €53 billion of Greek bond holdings of the European Central Bank, the eurozone Central Banks, the European Commission and the European Investment Bank were exempted from the exchange. This was effected through the expedient of a separate exchange of these holdings for new Greek government bonds with identical terms, but ‘issued’ in early 2012 and hence falling outside the debt perimeter, which included bonds issued up to the end of December 2011. The first of these three legacies showed a way forward for sovereign debt restructurings: ‘herd in’ all the creditors (or almost all) together and ask them to determine the acceptability of the proposed restructuring with an enhanced majority binding the minority. The second and third of these legacies exposed the weaknesses of this approach. Private and official sector creditors who can lawfully avoid the ‘herding’ will not be bound by the decisions of any supermajority of the creditors opting to get a better deal for themselves at the expense of both the sovereign debtor and the cooperating creditors. These three legacies, the manner in which local law advantage can be deployed, the weakness of the single series CACs and the effective priority that official sector creditors can claim, came after the key decisions had been taken on the design of the eurozone CACs. Although their specific design is not mandated by the ESM Treaty, consultations among eurozone Member States had resulted in an agreed ‘two limb’ design, namely a eurozone CAC (Euro-CAC) that required a successful vote both (i) across all the affected bond series in the aggregate and (ii) within each of these series individually.13 So from the very beginning the Euro-CACs, which require series by series voting, suffered from the weakness shown by the second legacy of the Greek debt restructuring, the single series voting of the English law bonds. If another eurozone sovereign, Arcadia,14 were to try to restructure its domestic law bonds using the Euro-CACs, the restructuring might be seriously compromised by a large number of holdouts or even fail. Moreover, the signal given to the markets by the official sector’s refusal to participate in the Greek debt restructuring was not a positive one. Just as some of the eurozone’s beleaguered members sought to maintain market access, the spectre of the official sector asserting priority, and thus increasing the size of a future private sector loss, did nothing to reassure markets and restore confidence. To calm the markets, steps had to be taken. In launching Outright Monetary Transactions (OMT), its emergency bond buying programme, the European Central Bank (ECB) stated that OMT bonds purchased by the Eurosystem will have ‘the same (pari passu) treatment as private or other creditors’.15 This was followed by the announcement that bonds acquired by the Eurosystem under the Public Sector Asset Purchase (PSPP) programme will have ‘the same (pari passu) treatment as private investors … in accordance with the terms of such instruments’.16 The OMT and the PSPP programmes were both challenged in German courts. These challenges resulted in two important decisions of the Court of Justice of the European Union (CJEU), Gauweiler17 and Heinrich Weiss,18 which consider, among other things, the compatibility of these programmes with the articles of the Treaty on the Functioning of the European Union prohibiting monetary financing.19 During the Gauweiler hearings, the CJEU’s Attorney General revealed in his opinion that ‘the ECB [in order to avoid participating in anything which amounts to monetary financing] has stated in its written observations that, in the context of a restructuring subject to CACs, it will always vote against a full or partial waiver of its claims [emphasis added]’.20 Waiver of claims in this context must be understood as being a reference not only to simply legal waivers of legal rights but also to amendments that attenuate its existing legal rights. In plainer terms, the ECB declared that it would be a holdout in any bond restructuring proposal by a eurozone sovereign. Although the statement is made on behalf of the ECB, it must be assumed that it also applies to all the entities in the Eurosystem, ie all the national central banks of the eurozone. All subsequent references to the ECB should therefore be assumed to apply to the whole of the Eurosystem. The OMT programme has many conditions to its use, and has not yet been deployed. By contrast, the PSPP programme is very active. Mindful that this would make the ECB a major eurozone government bondholder and also mindful of its promise not to vote in favour of any restructuring, the ECB's Governing Council set limits both on its overall bond holdings per eurozone sovereign issuer and on its per-series holding on each bond series.21 The limits were established expressly so that the ECB could not single-handedly prevent a debt restructuring.22 The limits expressed here and below (by reference to nominal principal amount, at 33 per cent overall and 33 per cent by series dropping to 25 per cent), which if reached would ‘create a situation whereby the Eurosystem would have a blocking minority for the purposes of collective action clauses’,23 are perilously close to the limits of the Euro-CACs.24 On the assumption that the ECB holds Arcadian government bonds as part of the PSPP programme, it is clear from these limits that it does not propose to sign any written bondholder resolution, which requires 66 2/3 per cent of bondholders in the aggregate and 50 per cent by each series to agree with the issuer’s restructuring proposals. Instead, the ECB will force Arcadia to call a bondholder’s meeting which, if it is to be quorate, must be attended by not less than 66 2/3 per cent of bondholders and which then requires the affirmative vote of 75 per cent in the aggregate and 66 2/3 per cent by each series to effect the restructuring. With a 33 per cent overall limit, the ECB can easily assist in making these meetings inquorate—this would require another two-thirds of 1 per cent, of the bondholders not attending—and hence block the restructuring. If ECB attends and the meeting is quorate, with 33 per cent overall limit ECB will block all overall restructurings, as its holding would always exceed the 25 per cent blocking vote for those present. The ECB, in its effort to avoid the Scylla of a market strike following the third legacy of the Greek restructuring, stated that it was prepared to have the same treatment as private investors. Unfortunately, this led it straight to the Charybdis of the prohibition of monetary financing. The solution is far from perfect. With its statement that it would oppose restructurings of all types in all circumstances, the ECB made the second legacy of the Greek restructuring, namely the holdout by individual series bondholders, even more likely. It will now be even easier for private sector holdouts to oppose restructurings: all they need to do is find out some details of the ECB’s holdings in the relevant series of bonds and then complement the ECB’s assured negative vote by buying enough additional bonds in that series to block a restructuring proposal. To top it all off, if notwithstanding its refusal, the ECB and the other holdouts are in a minority and the restructuring succeeds, the ECB will have to suffer losses and these losses may constitute monetary financing.25 In many ways, these two consequences are the better of the three possible outcomes in a potential debt restructuring by Arcadia. The combination of the ECB's declaration in Gauweiler and its PSPP programme means that a proposed Arcadian restructuring might fail altogether, having achieved neither the desired percentage for a bondholder resolution, nor a quorate meeting, or a positive vote in one. If this is correct, it means that the two negative legacies of the Greek restructuring not only continue but also have returned with a vengeance, threatening to undermine any future eurozone sovereign debt restructuring. This in turn means the troubled sovereign of Arcadia seeking assistance from the ESM may not be able to receive it because restructuring (aka, ‘private sector involvement’) is a pre-condition of the assistance.26 Where does this leave the eurozone defences? A number of solutions may be proposed for the medium and long term, by those who dream of some sort of fiscal union and revision of the EU treaties.27 Some measures are in the course of implementation, but progress is at snail's pace. In the short term, only two measures are possible. The first is the immediate revision of the Euro-CACs to include the single-limb option and otherwise improve other aspects of these CACs. The weaknesses of the current Euro-CACs have not gone unnoticed. In its December 2018 meeting the Eurogroup announced a series of measures for the deepening of the European Monetary Union including reforms for the ESM. These reforms include ‘[an intention] to introduce single limb collective action clauses (CACs) by 2022 and to include this commitment in the ESM Treaty’28 and were set out in a short-term sheet.29 As at the date of this article, the intention remains to be actualized and an agreed form of the new single-limb Euro-CACs has yet to emerge. The second measure, which will be required immediately if Arcadia loses market access and is in need of an ESM (and IMF?30) programme(s), will be to consider making use of the first legacy of the Greek restructuring, namely using the ‘local law advantage’. What does ‘local law advantage’ mean for Arcadia? At the very least, in the era of the double-limb Euro-CACs now contained in a significant part of Arcadia’s bond stock, it would mean the specific Greek solution of retrofitting the single-limb CACs. It cannot, however, be precluded that Arcadia may have to use the advantage of its legal sovereignty in all sorts of additional or different ways, depending on the circumstances. For the time being we will only consider its use for retrofitting single-limb CACs in its bond stock, a substantial proportion of which already has the ESM treaty mandated double-limb Euro-CAC. Inevitably, the question that arises is whether the local law advantage can be used in the context of Arcadia. For legal sovereignty to be of any value to Arcadia, the vast majority of its debt obligations must be governed by Arcadian law. We know that almost all eurozone countries (with the exception of Greece) raise debt by issuing almost exclusively domestic law bonds and so we will assume that this is the case for Arcadia as well. But can the local law advantage be deployed lawfully, or does the existence of the current form of Euro-CACs mandated by the ESM treaty make the use of Greek-style retrofitting unlawful? In a recent paper,31 Mark Weidemaier argues that Eurozone countries are not constrained by the current form of Euro-CACs and can, if they wish, make use of their local law advantage to retrofit single-limb CACs. Although I find Mark Weidemaier’s paper convincing and have been persuaded that eurozone countries are not so constrained, I understand that the position is not universally accepted. Clearly, as I have argued so far, if Mark Weidemaier’s conclusions are not correct and eurozone countries are constrained by the current double-limb Euro-CACs, the tools that the eurozone has at its disposal to deal with a loss of market access by Arcadia are severely limited. Indeed, as discussed earlier, the combination of the ECB's Gauweiler declaration and its PSPP Arcadian holdings may make an Arcadian restructuring impossible. In this article, I assume that Mark Weidemaier’s legal arguments and legal conclusions are correct so as to explore what further problems the eurozone and Arcadia may have to face, if the only way to ensure a debt restructuring and an ESM programme is a single-limb CAC retrofit. However, correct the legal arguments and conclusions may be they may not at first instance be accepted by all relevant parties. To begin with, Arcadia itself, wishing not to spook the markets, to retain access to them and avoid an ESM programme, may well adopt a Vade Retro Satana campaign against single-limb CACs and denounce any suggestion that it is not and will not remain committed to the existing Euro-CACs. Changes in eurozone policies relative to sovereign debt will be anathema to Arcadia, as they may carry the stigma that they are meant to protect it at a time when it tries desperately to rebalance its economy and avoid a crisis. Such public assurances that nothing other than existing contractual rights will be used are likely to make the use of the ‘local law advantage’ harder to justify later on, whether before judicial tribunals, to foreign investors or the citizens of Arcadia. How will the ECB react to a unilateral retrofit of single-limb CACs by Arcadia when the official Euro-CACs agreed also by Arcadia remain double-limbed? At this stage all one can do is speculate, but if within the ECB the concern about monetary financing and preserving the perceived legal order prevails over possible concerns for market reactions and crisis contagion, the ECB might consider doing or threatening to do one or more of the following: legally challenging the single-limb retrofit. Such a challenge would throw in doubt the whole restructuring. At the very least, it or any collateral proceeding before the notoriously slow and unpredictable Arcadian courts32 will delay the restructuring process; stating that the pari passu promise made in respect of the OMT and/or the PSPP programme was conditional upon the CACs being used on a restructuring either being the original double-limb ones, or, if single-limb, then at least approved by the Eurogroup or the EU Council. This is likely to terrify the markets, making any return of Arcadia to the markets more difficult and probably triggering a crisis for some other challenged European sovereigns; reconsidering the basis on which the, by now, collateral ineligible Arcadian sovereign bonds held by Arcadian banks will once again be accepted as eligible collateral. This will allow the ECB to hold Arcadia hostage as it can now determine whether Arcadia remains in the eurozone or not. It is of course possible that the ECB will neither do, nor threaten publicly to do, any of these things. However, the mere intimation that any of these might happen will be sufficient. If the ECB does take the view that it is not possible for it to accept the exercise of the local law advantage, then the least catastrophic solution may well be the repeat of the third Greek legacy, namely the exemption of the ECB from any restructuring. Arcadia may of course, despite its protestations that it is immune to a crisis, lose market access and be unable to roll over its debt. For the purposes of this article, we will assume that in such a case: Arcadia has to seek an ESM loan and programme and proceed with some sort of debt restructuring. Debt restructuring for this purpose includes (i) an extension of the debt maturities and/or (ii) a reduction of the principal amount owed and/or the interest rate payable on the principal amount; and the ECB will not oppose the use of the local law advantage. In such circumstances, how could Arcadia best use its local law advantage and what legal challenges could it face? Arcadia will first of all need to establish the perimeter of the debt to be restructured. At the same time, it will need to consider the overall debt requirements following any restructuring. To establish a credible medium-term debt sustainability, Arcadia must consider not only its own liabilities and post-restructuring requirements but also those of its banking system, its energy industry, its regions and municipalities and certain state-owned enterprises deemed to be vital. The exercise is likely to reveal a number of legal Gordian knots, which will only be capable of being resolved through the exercise of legal sovereignty which in some instances will have to take the form of the ‘local law advantage’, ie an interference with existing property and contract rights. The collective action challenges of bonds and other debt obligations will be only one of these Gordian knots. Retrofitting CACs in domestic law bonds and maybe even bringing other debt liabilities into the same class of debt is likely to be just one instance in which the ‘local law advantage’ may have to operate. To minimize the inevitable legal challenges and adverse market and political consequences that will follow the exercise of the ‘local law advantage’, Arcadia must follow the following principles: the ‘local law advantage’ should be as minimal as possible in the context of the specific crisis and the nature of the particular legal Gordian knots. Greece’s approach in limiting the exercise of the advantage to the Greek government bonds and those of the guaranteed liabilities which were already serviced by Greece, while leaving other guaranteed debt which was current and capable of being serviced by the relevant primary obligors outside the debt perimeter is an appropriate example; the ‘local law advantage’ should be grounded, where possible, on precedent, if not of Arcadian law, then deriving from the jurisprudence of other eurozone or EU Member States. Once again, Greece’s approach of combining the CAC retrofitting with an exit consent, which could cite the precedent of German law for corporate bonds, could serve as a guide; and the ‘local law advantage’ must be set out clearly and in a manner which ensures a fair and consistent application. This will be particularly important given that Arcadia will have to justify to the courts, the markets and its eurozone partners not only the departure from the Euro-CACs but also, quite possibly, other local law solutions required to solve other legal Gordian knots. Again, Greece is a case in point. The change in the bonds affected all the holders and it was applied across all of them (except for the official sector holdouts who forced Greece’s hand). In particular, domestic holders were subject to the same rule and its application as non-domestic ones. Such an application may well constrain the particular solutions which will be applied—for example, making a ‘haircut’ of the principal amount outstanding of bonds more difficult if they are held primarily by the Arcadian banking system and the Arcadian central bank. Precedent, a minimalist approach, and clear and fair application will assist in the defence of the ‘local law advantage’. As with Greece, legal challenges are likely to come before the Arcadian courts, arbitral tribunals and the ECHR. The success before the Arcadian courts will depend on whether, and subject to what conditions, property rights are protected under the Arcadian constitution. The outcome before arbitral tribunals will in turn depend on whether bonds are protected investments entitled to a better treatment than all other investors. Finally, success before the ECHR is likely to depend on whether the ECHR determines that the use of the local law advantage is consistent with the principles it sets out in the case of Mamatas and Others v Greece,33 a challenge against Greece’s CACs retrofit brought by about 6,300 individual bondholders (the ‘Applicants’). The ECHR is, of course, not an institution of the European Union, nor a separate institution of the Eurozone members, as is the ESM. It is an international human rights tribunal established by international treaty with jurisdiction to hear complaints submitted by individuals and states concerning violations of the Convention for the Protection of Human Rights and Fundamental Freedoms (commonly referred to as the ‘European Convention on Human Rights’), a convention which concerns principally civil and political rights (the ‘Convention’). The ECHR cannot take up a case on its own initiative, but will allow complaints by any person if they concern alleged violations of the Convention by any of its 47 party states which affect the complainant.34 In the Mamatas case, the Applicants submitted their complaint to the ECHR after the supreme Greek administrative court dismissed their request to set aside the Greek CAC retrofit law.35 Relying on the property protection provisions of the Convention,36 the Applicants complained that ‘the exchange of their bonds as required under the retrofit law had amounted to a de facto expropriation which had deprived them of their property or, in the alternative, an interference with their right to respect for their property’.37 Also by reference to the anti-discrimination provisions of the Convention,38 the Applicants ‘also complained that they had suffered discrimination as compared with other creditors, particularly the major creditors’.39 The ECHR accepted jurisdiction on these points, with some minor exceptions.40 In the following, I have tried to summarize the points made by the parties and the ECHR’s considerations and conclusions. The ‘Applicants claimed’, among others, that: they had been deprived of their property;41 there was no legal basis for the retrofitting of the CACs, which was a despotic ‘fait du prince’ seeking to discharge the Greek state of its liabilities without due compensation;42 their inclusion in the restructuring did not serve any public benefit within the meaning of the Convention, their share in the total debt being no more than 0.8 per cent of the total;43 no study was made by the Greek state on the economic benefit of their inclusion in the restructuring and no proposals were made to the creditors’ committee on a special treatment for the small investors, such as the Applicants;44 and the bonds given in exchange for their bonds are an insufficient consideration for their bonds and the government could, if it wanted to, take advantage of the depressed market prices at the day of the exchange, but instead sought to buy their bonds on a pure consensual basis.45 In response, ‘the Greek government responded’ that: by enacting the CAC retrofit law, the Greek state did not deprive any bondholder of its property. It simply introduced a process which enabled the bondholders to decide, on an enhanced majority basis (following the principle of creditor democracy), together with their debtor, on the best possible way to safeguard their proprietary interests, which were already at risk due to the insolvency of the Greek state;46 in exchanging the bonds, the Greek state did not expropriate or deprive any bondholder of its property, but instead it exercised its rights under the Convention. This allows a state to exercise its legislative powers to manage a financial crisis and determine what is in the public benefit, unless this lacks any reasonable basis. In this context, individual rights must take second place to the general interest. In any event, the value of the Applicants’ exchanged bonds always depended on the issuer’s economic ability to pay them;47 the CAC retrofit law was enacted constitutionally and the aim of the bond exchange was the legitimate goal of the Greek state to avoid a cessation of payments, prevent an economic collapse, help an economic regeneration and protect the eurozone. In the absence of the bond exchange and the achievement of these goals, the value of the Applicants’ bonds would have collapsed much more than the value offered in the exchange;48 the exchange did not offend the principle of proportionality, as the payment made to the bondholders was the maximum permitted by the official sector lenders (ie what was allowed under the official sector’s debt sustainability analysis) as a condition for them advancing further money to Greece, including the money to pay the bondholders;49 and through the exchange the Applicants received a fair and reasonable amount for their bonds given (i) the market value of their bonds at the time, (ii) the overall prospects of the Greek economy and (iii) the very real possibility that, absent the exchange, the Applicants might have suffered a total loss on their investment.50 The ‘ECHR noted, considered and held’ as follows: The Convention protects the dispossession (‘privation’) by the state of individual property, and only permits it under certain conditions, including that it be lawful, of reasonable proportionality, consistent with the general principles of public international law and in the public interest.51 In the case of debts, the amount must be due and payable (‘créance certaine’). Contingent claims are usually not protected unless recognized by applicable domestic law as legitimate expectations (espérance légitime).52 The ECHR’s established jurisprudence in matters of economic policy during a country’s economic crisis is that national authorities are better placed than the ECHR to determine the most appropriate means to manage the crisis and the ECHR will respect their choices, unless they manifestly lack any reasonable basis. Moreover, in situations where legislative measures are likely to have a considerable economic consequence on the whole of the country, the national authorities must enjoy a large degree of discretion not only in choosing the measures with which they will protect and regulate property relations within the country but also in the time necessary for their implementation.53 The Applicants’ Greek government bonds did constitute a property interest, which was protected by the Convention. The CAC retrofit law did interfere with the Applicants’ property rights as did the imposition of the exchange, to which they had objected.54 This interference, however, did not amount to a dispossession (‘privation’) protected by the Convention, (i) first, because the Applicants made a market investment whose price depends on market conditions and on the economy of the issuing state, and (ii) secondly, because the conditions, which according to the Convention permit such interference (see 3(a) above), were satisfied.55 Lawful. An interference by the state on individual property rights must be lawful, a requirement which is not satisfied by mere legality. It must also maintain a balance between the public interest and the protection of the individual’s fundamental rights. Such a balance is not maintained if the individual suffers personally an excessive loss. In this instance, the requirement of lawfulness was satisfied because the interference was based on legal rules that were sufficiently accessible, specific and predictable as to their effect. Moreover, the requirement of balance was met because these rules were non-discriminatory in their application over the affected persons, namely all the holders of Greek government bonds.56 In the public interest. To be permitted, state interference on individual property rights must be in the public interest. In this instance, given the seriousness of the crisis, the state did take legitimate steps to protect the public interest aiming to restore economic stability and to restructure the national debt.57 Proportionality I. Finally, to be permitted, such state interference must also be proportionate by reference to the goal pursued. In exchange for their property, the old bonds, the Applicants were immediately offered a new bond whose discount at 53.5 per cent was deep, but far from a total discount. Moreover, the discount has to be considered in the context of such a bond’s current market price, not the bond’s nominal price, and at the time of the exchange the market price of the bond was severely depressed. The discount also has to be considered in the context of what might have happened to the bond’s price if the restructuring had not succeeded, which would have pushed the market price even lower. Proportionality II. The Applicants had the ability to sell their bonds, up to the point that the exchange was announced, especially if they knew that they did not want to participate in it. (Of course the announcement of the exchange in itself had consequences for the price, since the bonds were now subject to this potential change. However, the argument of the ECHR seems to be that the Applicants were not specifically prejudiced and that the Applicants’ rights to dispose of their property in the market, before the vote which encumbered their bonds with CACs was taken, were not curtailed in any way.)58 Proportionality III. The major institutional investors requested, as a condition for accepting a debt haircut, that the bonds be retrofitted with CACs. The absence of CACs would have made the restructuring more difficult to achieve and would have started the vicious circle of increasing the losses for those who would be willing to participate in the restructuring, which in turn would increase the numbers of those wishing to hold out. It is therefore clear that the retrofitting of the CACs and the debt restructuring achieved thanks to them constituted an appropriate and necessary measure to achieve the reduction of the Greek public sector debt and to avoid a cessation of payments by Greece.59 Proportionality IV. In conclusion, Greece did not breach the fair balance between the public interest and the Applicants’ individual rights and did not impose on the Applicants an excessive loss. In the overall context of the wide discretion which sovereigns have in taking measures, the ones taken by Greece were not disproportionate and as a result there was no breach by Greece of the Convention.60 Mamatas goes on to consider and then dismiss the Applicants’ additional complaint that the Greek retrofit law should have somehow exempted them from its scope.61 This complaint is not considered here but may be relevant in the context of an Arcadian restructuring, where individual investors are affected. The first and important point to note about Mamatas is that it is a decision on the facts. The ECHR finds that there is an interference with protected property rights but that in the context of the particular circumstances this interference was justified. It is clear that the ECHR does not offer a judgment, which will allow Arcadia to use the ‘local law advantage’, even if it uses it exactly as Greece did, regardless of the circumstances. The elbow room that sovereigns such as Arcadia have in using the ‘local law advantage’ is considerable given the sovereign discretion that it has in defending the public interest, but it is not without limits. If Arcadia chooses to exercise the ‘local law advantage’, it will have to do so in the appropriate way given the circumstances at the time. The discussion of the Greek circumstances in Mamatas will no doubt be useful to its officials when faced with these circumstances. But the importance of Mamatas goes beyond this. In paragraph 116 of the judgment, Mamatas tackles the puzzle of collective action. It notes that without collective action rules, the willingness of stakeholders to participate in the resolution of the crisis diminishes, generating a vicious circle of increased costs for participants, itself acting as a disincentive for participation. It is exactly this vicious circle that collective action processes in the context of corporate insolvencies aims to break and which measures such as aggregating CACs seek to bring into sovereign bond restructurings. The ECHR notes that without these retrofitted CACs, the Greek debt restructuring would not have succeeded, Greece would have had to stop paying all its creditors, including all its bondholders and would have itself suffered even greater economic loss. Although Mamatas does not state this expressly, the conclusion is clear: both the collective loss for Greece and the individual loss for all bondholders, including each Applicant, would have been greater but for the retrofitting and use of aggregated CACs, which were therefore an ‘appropriate and necessary measure’. The introduction of an instrument which resolves the puzzle of collective action by maximizing utility both in the aggregate and per class of stakeholders whilst minimizing overall losses is, I submit, an important principle established by Mamatas. In paragraph 115 of the judgment, Mamatas states that at the time of the Greek CAC retrofit, CACs were included in international bonds issues and that the eurozone had decided that its members would include CACs in all their future bond issuances. It may be argued that this reference to the Euro-CACs will make a future ECHR more reluctant to accept an Arcadian retrofit of single-limb aggregated CACs when most of the Arcadian bonds include Euro-CACs. However, likely it is that such an argument will be made, I submit that the reference to the Euro-CACs is not an endorsement of the particular features of the current two-limb Euro-CACs, but a reference to evidence that CACs are generally being proposed to resolve the puzzle of collective action. I also submit that if the ECHR were to consider whether Arcadia was justified in using the ‘local law advantage’ in retrofitting single-limb CACs in crisis circumstances (a) not dissimilar to Greece’s and (b) where ECB and private sector holdouts threatened the success of the restructuring, it would allow the ‘advantage’. The justification would rest on the principle deriving from paragraph 116 of Mamatas (but elsewhere as well) on the need for a collective action measure, which is uniformly applicable to all creditors and avoids setting in motion the vicious circle which leads to increased holdouts and overall greater losses. The ECHR would, of course, note the existence of the Euro-CACs and would have to consider the repeated Arcadian reassurances that these would not be changed through retrospective legislation. But the ECHR would also have to consider both (a) the Eurogroup’s decision to move on to single-limb CACs as an acknowledgement that it is the optimal resolution of the collective action puzzle that matters, rather than an imperfectly designed tool for it, (b) as well as the difficulties that the ECB’s decision brings in any attempt to resolve the collective action puzzle, especially with the current less-than-perfect Euro-CACs. If this analysis is correct, the Mamatas principle, most clearly set out in its paragraph 116, can also serve to justify ‘local law advantage’ measures proposed for other parts of a sovereign debt crisis resolution, such as the inclusion in the debt parameter of a wider class of debt obligations. This leads to four additional topics that deserve to be considered further, although not in this article. First, what I have referred to as the Mamatas principle needs to be further discussed and commented on in the context of options open to Arcadia if it ever faces a potentially catastrophic sovereign crisis. This, of course, will depend on the identity of Arcadia among eurozone Member States, the specific challenges it faces, the institutional alternatives available to it and the stance of all other relevant actors. What applied to a small eurozone economy such as Greece on all these fronts between 2010 and 2012 is very different to what applies to today’s Italy. Mamatas offers guidance and, I have argued, principles. Ultimately, however, the Mamatas judgment is rendered on the facts of the case and these will have to be considered in detail by any individual Arcadia, which finds itself in a predicament similar to Greece. Secondly, to what extent are the principles of Mamatas a source of law for the Court of Justice of the European Union and indeed for domestic administrative courts and to the extent that they are not, how could these three systems of law operating in Europe—domestic, EU and ECHR—find ways to build on each other’s jurisprudence? It is important for the Eurozone and its members to develop a uniform jurisprudence on the questions discussed in Mamatas and to avoid the uncertainty creating and, ultimately, destructive Tower of Babel of different institutional narratives. Thirdly, the use of the ‘local law advantage’ is, regardless of justification, a breach of the sovereign commitment to its creditors. Using it will inevitably have short-term consequences, one of which is the lack of trust in the sovereign’s own laws. A condition for the return of Greece to the markets was the use of an external law which deprives the sovereign from unilateral changes to the contractual terms.62 Investors may well seek the insulation of such an external law, which may well prevent in the future even a benign application of the ‘local law advantage’, as would be the case if Arcadia’s bonds were all governed by external law and the use of Euro-CACs continues to have the disadvantages discussed earlier in this article. Fourthly, the limits of sovereign discretion and the local law advantage as exercised by Greece (and as may have to be exercised by the eurozone’s Arcadias) and the principles set out in Mamatas need to be considered in the context of the discussion on institutions, credible commitment and their relevance for economic growth.63 Quickly summarizing the complex arguments on which a lot more work is still being done: for ‘economic growth to occur the sovereign … must not merely establish the relevant set of [property] rights, but must make a credible commitment to them’.64 Commitment by a sovereign is credible when sovereign action is constrained by rules and institutions ‘that do not permit leeway for violating commitments’.65 These institutions include the legal institutions, which are the custodians, interpreters and enforcers of the rules. The strength of legal institutions rendering credibility to the commitment ultimately depends on the clarity, sufficiency and predictability of the rules and on the transparency, fairness of process and competence with which they are administered. Shortcomings in these institutions will adversely affect economic activity and growth, which in turn will have consequences on the broader domestic political economy and the standing of the sovereign in the world. Greece’s reliance on the ‘local law advantage’ was unusual and was fully scrutinized by, among others, the ECHR in Mamatas. If Arcadia has to use the ‘local law advantage’ in the shadow of both Greece and of the efforts made to avoid using the advantage, its actions will be scrutinized even more. Ultimately, the scrutiny will be that of economic actors whose decisions will affect the future economic prosperity of Arcadia. Clarity on the limits of the ‘local law advantage’ and credibility as to the exceptional nature of its use and the overall economic utility of its outcome are essential for its short-term successful application and for the medium-term economic future of Arcadia. I hope that others will join this conversation and the ECHR will be persuaded to publish the Mamatas decision in other languages as well, at least English and German, to enable a wider and better conversation. The author wishes to thank the European University Institute (EUI), the Brevan Howard Centre at Imperial College and BAFFI CAREFIN at Bocconi University and in particular Franklin Allen, Elena Carletti, Jeromin Zettlemeier and Mitu Gulati for inviting me to participate in the Annual Conference of the Florence School of Banking and Finance, part of the EUI’s Robert Schuman Centre for Advanced Studies entitled ‘European Financial Infrastructure In the Face of New Challenges’ hosted at the EUI in Florence on 25 April 2019. I acknowledge the helpful discussions with Pedro Bizarro, Peter Crossan, Katherine Crispi, Anna Gelpern, Sebastian Grund, Mitu Gulati, Matthew Hartley, Alexander Metallinos and Mark Weidemaier (all of whom regardless of professional affiliations expressed their personal views). The views set out in this article are mine, they are strictly personal and do not represent the views of Allen & Overy LLP. Footnotes 1 Strictly speaking, loans came from all the other eurozone countries, except from Slovakia, which did not lend at all, and Germany, which did not lend directly but through KfW, the German state development bank. 2 Details on the EFSM and its activities can be seen here . 3 A summary view of the ESM’s toolkit is available here . 4 Eurogroup statement of 28 November . 5 I have attempted a summary of these in ‘Restructuring of Greek Sovereign Debt’ March 2017, Global Restructuring Review . The article includes a number of references, including Jeromin Zettelmeyer, Christoph Trebesch and Mitu Gulati, ‘The Greek Debt Restructuring: An Autopsy’ (August 2013) . 6 For these purposes, the Shorter Oxford English Dictionary definition will suffice: ‘Rule of law is the doctrine that arbitrary exercise of power is controlled by subordinating (governmental, military. economic, etc.) power to well defined and impartial principles of law: specifically the concept that ordinary exercise of governmental power must conform to general principles as administered by the ordinary courts’. 7 For English law authority, see Re Helbert Wagg & Co Ltd [1956] Ch 323, which held that the governing law applying to the agreement is the chosen domestic law as it exists from time to time and Kahler v Midland Bank [1950] AC 24, per Lord Radcliffe ‘the proper law, because it sustains, may also modify or dissolve the contractual bond’. 8 For a fuller discussion of the Local Law Advantage, see Lee Buchheit and Mitu Gulati, ‘Use of the Local Law Advantage in the Restructuring of European Sovereign Bonds’ (April 2018) . 9 Debt Securities Act 2009 (Gesetz über Schuldverschreibungen aus Gesamtemissionen –Schuldverschreibungsgesetz). My sources on this are secondary and are based on (a) an article in Thomson Reuters’ ‘Practical Law’ by Axel Vogelmann and Christian Halász (available by subscription only) and (b) Allen & Overy LLC’s publication ‘Government bond restructuring “made in Germany”—the rise of anti-holdout clauses’ . 10 Constitution of the Hellenic Republic, Art 17(a) . 11 Constitution of the Hellenic Republic, art 106(1). 12 See principally the various policy papers of the IMF starting with ‘Sovereign Debt Restructuring—Recent Developments and Implications for the Fund’s Legal and Policy Framework’ (26 April 2013) and ‘Strengthening the Contractual Framework to Address Collective Action Problems in Sovereign Debt Restructuring’ (2 September 2014). 13 European Union's Economic and Financial Committee ‘Euro area Model CAC 2012’, which also contains links to the model Euro-CACs here . 14 The fictional name of Arcadia is chosen to allow the discussion to focus on aspects of structure, which are either positive or need improvement and avoid focusing on the particulars of any single eurozone Member State. 15 See ECB’s Press Release, ‘Technical Features of Outright Monetary Transactions’ (6 September 2012) . 16 See ECB’s Decision (EU) 2015/774, (4 March 2015) . 17 Case C-62/14 Gauweiler and Others . 18 Case C-493/17 Heinrich Weiss and Others . 19 See Sebastian Grund, ‘The European Central Bank's Public Sector Purchase Programme (PSPP), the Prohibition of Monetary Financing and Sovereign Debt Restructuring Scenarios’ (November 2016) . 20 Para 235, Opinion of Advocate General Cruz Villalón delivered on 14 January 2015 . 21 ECB Governing Council, (3 September 2015) . 22 See reference to the statement where the by-series limit is set at ‘33%, subject to a case-by-case verification that it would not create a situation whereby the Eurosystem would have a blocking minority for the purposes of collective action clauses in which case the issue share limit would remain at 25%’, ibid. 23 Ibid. 24 Euro-CACs (n 13). 25 See Grund (n 19) , where these questions are considered in detail in the context of an all-possibilities calculus. 26 See Recital 12 and elsewhere in the ESM Treaty . 27 For some countries, this dream is a nightmare. 28 See ‘Eurogroup Report to Leaders on EMU Deepening’ (4 December 2018) . 29 The term sheet, in its usual unmarked form, is available here . 30 The participation of the IMF in the Greek rescue programme raised a number of issues which remain unresolved. As a result the participation of the IMF in any future eurozone rescue programme cannot be taken for granted. 31 See Mark C Weidemaier, ‘Restructuring Italian (or Other Euro Area) Debt: Do Euro CACs Constrain or Expand the Options?’ (2 April 2019) . 32 This is assumed by virtue of the poetic licence necessary to weave the tale of Arcadia. 33 Mamatas and Others v Greece (Application nos 63066/14, 64297/14 and 66106/14). Text of the decision available in French here . 34 As the ECHR’s website does not appear to have a basic introduction to the ECHR itself, its history and activities, details and the source of the above summary, come from the ‘International Justice Resource Center’ . 35 Greek Law No 4050/2012. For a summary of the reasons for which the Greek court dismissed their request, see the discussion earlier in this article. Strictly speaking the proceedings before the Greek administrative courts included not only the retrofit law 4050/2012, but also all the two decisions of the Council of Ministers of 24 February and 9 March 2012, the 9 March 2012 decision of the Deputy Minister for Economic Affairs and the 9 March 2012 decision of the Governor of the Bank of Greece, which implemented the law. 36 Art 1 of Protocol No 1 to the Convention. 37 See the ECHR English language Press Release with the summary of the case here . 38 Art 14 in conjunction with art 1 of Protocol No 1. 39 ECHR Press Release (n 37). 40 See Mamatas and Others v Greece, paras 58–72. 41 Ibid, para 73. 42 Ibid, para 74. 43 Ibid, para 75. 44 Ibid, para 76. 45 Ibid, para 77. 46 Ibid, para 78. 47 Ibid, para 79. 48 Ibid, para 80. 49 Ibid, para 81. 50 Ibid, para 82. 51 Ibid, para 84. For these principles, see art 1 of Protocol 1 of the Convention. 52 Ibid, paras 86 and 87. 53 Ibid, paras 88 and 89. 54 Ibid, paras 90–3. 55 Ibid, para 94. 56 Ibid, paras 95–100. 57 Ibid, paras 101–5. 58 Ibid, paras 106–14. 59 Ibid, para 116. 60 Ibid, paras 119 and 120. 61 Ibid, paras 121–42. 62 It is my view that the insistence on external law to govern the Greek bonds in 2012 was due to two reasons. First, by the creditor concern that the debt relief provided by the private sector in 2012 was not sufficient to make the debt sustainable and that, hence, a further measure might have to be taken. The insufficiency, of course, was the result of the delay of the Greek restructuring and the official sector bailout of 2010. Secondly, because the choice of using the ‘local law advantage’ was in essence being made not only by Greece, but also by the eurozone and official sector more broadly. As a result the perception of the investors was that, notwithstanding Greek willingness to maintain or rebuild trust with the markets in 2012, this was not Greece’s exclusive call and, therefore, the insulation of foreign law was the only option available to them. 63 See Douglass C North and Barry R Weingast, ‘Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England’ (1989) XLIX(4) The Journal of Economic History 803–32; Douglass C North, ‘Institutions and Credible Commitment’ (1993) 149(1) Journal of Institutional and Theoretical Economics (JITE) / Zeitschrift für diegesamte Staatswissenschaft 11–23. I am grateful to Mitu Gulati for supplying these references and through this suggesting the third topic for additional work. 64 North and Weingast (n 63) 803. 65 Ibid 804. © The Author(s) (2019). Published by Oxford University Press. All rights reserved. For permissions, please email: journals.permissions@oup.com This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/open_access/funder_policies/chorus/standard_publication_model) TI - Using the local law advantage in today’s eurozone (with some references to the Republic of Arcadia and the Mamatas judgment) JF - Capital Markets Law Journal DO - 10.1093/cmlj/kmz021 DA - 2019-10-01 UR - https://www.deepdyve.com/lp/oxford-university-press/using-the-local-law-advantage-in-today-s-eurozone-with-some-references-TghU8oNwHb SP - 469 VL - 14 IS - 4 DP - DeepDyve ER -