English law set to rule new Greek bonds by Costas Papachlimintzos

15 Jan 2012

Deputy Finance Minister Filippos Sachinidis told parliament last week that the i ssue of new bonds coming under English law was under discussion The request from our creditors that the new bonds be governed by English law has not been accepted, Prime Minister Lucas Papademos declared on December 2, speakin g to the parliament. A month later, tough negotiations on the private sector inv olvement (PSI) deal are reportedly forcing the Greek government to cross this re d line and accept the issuance of the new bonds under English law, satisfying a key bondholder demand and depriving Greece of a great advantage over its credito rs. Lee Buchheit, a partner at international law firm Cleary Gottlieb Steen & Hamilt on that acts as an advisor to the Greek government on the PSI, had written a few months ago that by far the greatest advantage that Greece would enjoy in a restr ucturing of its debt derives from the fact that so much of the debt stock is exp ressly governed by Greek law (90 percent or more). In a paper entitled Greek debt: The endgame scenarios, Buchheit, one of the most p rominent lawyers globally in debt restructuring cases, said that that the restruc turing could be facilitated in some way by a change to Greek law. If English law is applied to the new bonds issued under the complex PSI, the Gre ek side would have to face the following consequences: Property confiscation: According to international law as well as many national l egal systems, when a property is located within the jurisdiction of the legislat ing state, the latter has the power (de facto or by law) to nationalise or trans fer property without compensation. The Wall Street Journal reported on January 5 that Greece has agreed to consider that the new bonds be governed by English law , which means creditors would be allowed to seize Greek assets if the country fa ils on its payments. Tied hands: If bonds are governed by Greek law, its going to be easier for Greek l egislature to pass a law that simply amends the bonds, which would be much more difficult to do for English law-governed bonds, Steven Friel, a litigator with la w firm Brown Rudnick, told Reuters. As Buchheit wrote, no other debtor country in modern history has been in a position significantly to affect the outcome of a sovereign debt restructuring by changing some feature of the law by which the va st majority of the instruments are governed. Jurisdiction: The right to sue in an English court offers investors a greater cha nce of holding out against a restructuring, The Economist recently wrote. As argu ed by university professors Stephen Choi (New York), Mitu Gulati (Duke) and Eric Posner (Chicago) in their paper Pricing Terms in Sovereign Debt Contracts: A Gre ek Case Study with Implications for the European Crisis Resolution Mechanism, the holder of an English-law bond, because of the supermajority approval provisions in the bond covenants as governed by English law, would have a greater ability t o resist any potential restructuring offer than the holder of a Greek-law bond, who basically would have no ability to hold out. http://www.athensnews.gr/issue/13478/52264