Last month, Joseph Weiler’s post on Catalonian independence and the European Union triggered a lively discussion here on EJIL!Talk (including Nico Krisch’s reply). Yesterday’s publication by the British government of a legal opinion by Alan Boyle of the University of Edinburgh and James Crawford of the University of Cambridge, entitled ‘Referendum on the Independence of Scotland: International Law Aspects’ has already received extensive news coverage (eg BBC, New York Times, Guardian, FT) and was labelled as ‘incredibly arrogant’ by the Scottish deputy first minister. In a riposte, the Scottish government accelerated publication of a report on the macroeconomic framework in case of Scotland’s independence. A committee composed of economists, including Nobel prize winners Joseph Stiglitz of Columbia University and Sir James Mirrlees of the University of Cambridge, suggested that if the Scottish people voted for independence in 2014, a formal currency union between UK and Scotland, with a 10 percent Scottish stake in the Bank of England, would be the most likely outcome. The currency that Scotland would use in the event of independence and Scottish membership in international organisations, most importantly the European Union, have been focal points of the discussion in the lead-up to the referendum.
In a landmark decision, the EFTA Court on 28 January 2013 dismissed all claims brought by the EFTA Surveillance Authority against Iceland in the Icesave case. The Authority had alleged that Iceland had breached its obligations under Directive 94/14/EC on deposit guarantee by failing to compensate Icesave depositors and had violated the prohibition on non-discrimination in the Directive and Article 4 of the EEA Agreement by prioritising payments to domestic savers. The court, referring to the collapse of the Icelandic banking system as an “enormous event” (para. 161), found that Iceland was not responsible for the liabilities of the Icelandic deposit insurance scheme that was overwhelmed with claims following the collapse of Iceland’s three major banks.
Icesave refers to two branches of the Icelandic bank Landsbanki that accepted deposits offering comparatively high interest rates in the UK and the Netherlands. Deposits in these branches were primarily the responsibility of the Icelandic Depositors’ and Investors’ Guarantee Fund (TIF). Following the wholesale collapse of Iceland’s banking system in October 2008, savers in the UK and the Netherlands lost access to their deposits on 6 October 2008. The Icelandic Parliament adopted emergency legislation on the same day to split Landsbanki into a good and a bad bank. By virtue of the same legislation, it gave priority to depositors as compared to other creditors (for further background on the Icesave dispute, including the unsuccessful negotiations between Iceland and the UK/Netherlands, see my ASIL Insight Iceland’s Financial Crisis – Quo Vadis International Law).
On 15 December, the International Tribunal for the Law of the Sea (ITLOS) ordered Ghana to release the Argentine military training vessel ARA Fragata Libertad (see oral proceedings). NML Capital, an investment company focused on distressed debt based in the Cayman Islands and owned by Elliot Associates, a US hedge fund, had earlier obtained an order from the Ghana Superior Court of Judicature (Commercial Division) to attach the Libertad moored in the port of Trema to satisfy a judgment by a US District Court for payment on defaulted Argentine bonds. The Libertad was on an official goodwill mission in Ghana’s internal waters at the time of the attachment. Read the rest of this entry…
On September 12, 2012, the German Constitutional Court dismissed several constitutional complaints that sought an injunction to prevent German ratification of the European Stability Mechanism (ESM) – a central pillar of the Eurozone’s crisis response – and the Fiscal Treaty in the preliminary phase of the proceedings (extracts in English). A full ruling is expected in a few months. German ratification is required for the ESM treaty to enter into force, and critical in financial terms for the ESM’s credibility. The Court’s preliminary ruling means that the last hurdle for the ESM to enter into force has now been cleared. German ratification should follow in the next few weeks.
The court conditioned German ratification on two reservations to the ESM treaty: first, the German capital subscription needs to be limited to 190 billion Euros, as provided by the ESM Treaty (though the ESM’s capital may be increased beyond this ceiling pursuant to the procedure forseen in Article 10 of the ESM Treaty); and second, notwithstanding the confidentiality of the ESM’s deliberations, the German Parliament needs to be fully informed about operations of the ESM. The Bundesverfassungsgericht seized its one chance to foreclose two possible, but unlikely interpretations of the ESM Treaty that would conflict with the German Constitution before interpretative authority passes to the Court of Justice under the ESM Treaty.
The Court’s insistence on two reservations is only a small “but”. The Court took issue with two aspects that are marginal to the firepower and effectiveness of the ESM. The decision has virtually no effect on how the ESM will operate, and in particular on the capital that the ESM will have its disposal. It could lengthen the German ratification process by a few weeks, but the Court’s decision has removed substantial unertainty about the Eurozone crisis response. Most other Eurozone member countries, including France and Spain, have already ratified the treaty. According to Article 48 of the ESM Treaty, the Treaty enters into force once countries representing 90 percent of capital subscriptions have ratified. The German share in of the total capital subscriptions of 700 billion Euros is just over 27 percent.
In June, I looked at the longstanding sovereignty dispute over the Falklands Islands (Malvinas) on the occasion of the 30-year anniversary of the 1982 war. I revisit this topic today to examine the question of investor protection in areas where sovereignty is disputed, taking the Falklands (Malvinas) as an example. The promise of an oil boom in the South Atlantic has prompted several companies listed in London, including Falkland Oil and Gas, Borders and Southern Petroleum, Rockhopper, Desire Petroleum and Argos Resources, to survey the area. They obtained exploration licenses from the Falklands administration in 2011, which drew strong criticism from Argentina. Shareholders in these inherently risky ventures may wonder whether they have any legal protections should the sovereignty dispute intensify.
The sovereignty dispute adds an additional layer of uncertainty for the companies engaged in exploratory drilling and their shareholders, aside from the uncertainty on how much oil, if any, will ultimately be discovered. The listing prospectuses of the companies concerned all mention the pending sovereignty dispute as a risk factor, but likely underplayed its importance. For example, the Falkland Oil and Gas Prospectus contains the following disclaimer:
There may be other unforeseen matters such as disputes over borders. Investors will be aware that the Falkland Islands were, in 1982, the subject of hostilities between the United Kingdom and Argentina.
The Argentine Government has not relinquished all its claims in relation to the Falkland Islands. However, the position of the UK and Falkland Islands Governments is that the United Kingdom has no doubt about its sovereignty over the Falkland Islands, South Georgia and the South Sandwich Islands and the surrounding maritime areas. Her Majesty’s Government remains fully committed to the offshore prospecting policy pursued by the Falkland Islands Government, as laid out in the Offshore Petroleum (Licensing) Regulations 2000. This policy is entirely consistent with Her Majesty’s sovereign rights over the Falkland Islands.
Do investments in the territorial sea of the Falklands (Malvinas) fall under the territorial scope of application of the UK’s BIT (or, for that matter, under the scope of Argentina’s BITs)? Read the rest of this entry…
While financial markets have focused on Karlsruhe where the second challenge to the Eurozone rescue efforts in a year is currently pending, the Irish Supreme Court held on July 31 that Irish ratification of the Treaty establishing the European Stability Mechanism and the Fiscal Treaty was compatible with the Irish constitution. The court referred two questions to the Court of Justice under the latter’s accelerated preliminary reference procedure due to the exceptional urgency of the case. Notwithstanding, the Supreme Court declined to enjoin the Irish ratification process while the case is pending before the Court of Justice. The Irish government ratified both treaties on August 1.
In contrast, the German Bundesverfassungsgericht bidded its time on a similar challenge to German ESM ratification. Ireland is on the frontline of the Eurozone crisis. The Economist, in departure from the deference it typically pays to court proceedings, called the German Constitutional Court ‘ scandalously slow’ . Ireland is one of three Eurozone countries with an EU-IMF financing package in place. Most of the support is provided by the European Financial Stability Facility that the ESM is designed to replace once it starts operating. The need to decide this significant case as a matter of urgency was evident to the Irish Supreme Court. It put seven judges on the appeal, super-fast-tracked the hearing, and reserved four days for the hearing.
On August 1, the European Court of Human Rights (ECtHR) dashed hopes of Northern Rock shareholders to obtain compensation from the UK for the collapse and nationalization of British bank Northern Rock. The Fourth Section of the ECtHR unanimously dismissed the case Dennis Grainger and others v. UK (Application No. 34940/10) as manifestly ill-founded and inadmissible. The decision has broader ramifications. It suggests that member countries of the European Convention of Human Rights (ECHR) have a wide margin of appreciation in setting macro-economic policy in general and in the resolution of banking and financial crises in particular. The ECtHR decision suggests that creditors and other interested parties will face an uphill struggle in challenging measures taken in the context of financial crisis resolution before the ECtHR and in obtaining compensation. It is an important decision at the intersection of international finance and human rights. Investors holding the debt of Eurozone governments will take note.
The court fully endorsed the holding and approach of the English courts. Like the English domestic courts, it found that the assumptions that the valuer of Northern Rock shares was required to make pursuant to the Banking (Special Provisions) Act 2008 s.5 (4) did not violate the rights of shareholders under Article 1 of the First Additional Protocol.
June 14 2012 marked the 30th anniversary of the end of the 1982 Falklands (Malvinas) War. After a decade of relative calm and increased technical cooperation on the Falklands (Malvinas), diplomatic tensions between Argentina and the UK have flared up in the lead-up to this anniversary. A concerted diplomatic push by Argentina has returned the sovereignty dispute over the Falklands (Malvinas) to the top of the foreign policy agenda. On June 14, Argentine President Kirchner made an emotional appeal to the UN Special Committee on Decolonisation for bilateral negotiations on sovereignty between Argentina and the UK. She was the first head of state to speak to the Committee. A recent conference at the University of Cambridge explored why the Islands remain so deeply rooted in the Argentine psyche.
The dispute over the Falklands (Malvinas) has returned centre stage just as the prospects of substantial hydrocarbon reserves in the seas surrounding the Islands greatly increased the economic stakes of the sovereignty dispute. The promise of an oil boom in the South Atlantic has prompted several companies listed in London, including Falkland Oil and Gas, Borders and Southern Petroleum, Rockhopper, Desire Petroleum and Argos Resources, to survey the area. They obtained exploration licenses from the Falklands administration in 2011, which drew strong criticism from Argentina. Earlier, both Argentina and the UK had anticipated that cooperation in matters of natural resources was desirable, given the uncertainty generated by their sovereignty dispute. Read the rest of this entry…
Review of Expert Determinations of the International Swaps and Derivatives Association by Domestic Courts
A central policy concern since the onset of the Greek debt crisis in 2010 has been whether sovereign debt restructurings trigger credit default swaps (CDS). CDS are insurance-like financial products whereby a protection seller agrees to pay the protection buyer in case of a credit event on a reference entity (in this case Greece) in return for a premium over a defined period of time. The legal framework for CDS transactions is largely standardized. More than 90 percent of CDS transactions are based on the ISDA Master Agreement. As a mechanism for creditors to hedge against the default of a debtor, CDS are financial instruments to redistribute risk (or, according to their defenders, to shift risk onto those entities willing and capable of better bearing such risks). Over the last two decades, CDS on sovereign debtors became increasingly common.
Greece’s debt restructuring in February/March 2012 was the first to be implemented under the umbrella of a large number of CDS (more than 2.5 billion Euros in net terms). During the implementation phase of the Greek restructuring in March 2012, several interested market participants raised the question whether the Greek restructuring triggered an obligation for the sellers of CDS on Greece to pay. The Determinations Committee (DC) of the International Swaps and Derivatives Association (ISDA) for Europe, Middle East and Africa, the body established by ISDA and given decision-making power under the ISDA documentation to rule on credit events, found that a restructuring credit event was triggered on March 9 2012. The parties to CDS have agreed by contract that a credit event occurs only if the competent DC has said so.
As the Greek restructuring in February/March 2012 demonstrated, the consequences of such expert determinations by DCs can be momentous in financial terms not only for the parties to CDS transactions themselves, but also for the broader public and for taxpayers. A case in point is the Austrian bank KA Finanz, the bad bank split off from Kommunalkredit, the comparatively small Austrian lender to municipalities previously owned by Dexia that the Austrian government nationalized at the height of the global financial crisis. KA Finanz had taken over about 500 million Euros of CDS on Greece from Kommunalkredit. As a result of the payouts following the March 9 decision, the Austrian government had to inject another 1 billion Euros into the bank in order to stave off its collapse.
DCs recruit their members from among financial institutions and investment managers, which will often have positions on either side of CDS transactions. In view of their composition and the considerable practical importance of their decisions, concern has arisen that DC members may be tempted to “vote their own book” – i.e. to reach credit determinations in part based on whether the firm is on the buying or selling side of CDS for a particular reference entity. For instance, two members of the Steering Committee of the Institute of International Finance which negotiated the restructuring of Greek debt on behalf of private creditors of Greece, are voting members of the DC for Europe (BNP Paribas and Deutsche Bank). They were net sellers of CDS protection on Greece, meaning that both institutions had to pay out to protection buyers when the credit event occured. Given these concerns about independence of DCs and the right to a fair trial in civil matters under Article 6 of the European Convention, it is an open question whether competent domestic courts could in effect review decisions and potentially overturn decisions of DCs. Read the rest of this entry…
Michael Waibel is a British Academy Postdoctoral Fellow at the University of Cambridge.
On 7 September 2011, the German Federal Constitutional Court gave judgment in three joined cases regarding the constitutionality of German financial assistance to Greece and of its guarantees to the European Financial Stability Facility (EFSF). The Eurozone rescue efforts are widely seen to stand (or fall) with the government in Berlin. Germany is the largest contributor to the Greek rescue and the EFSF with more than 27 percent, or 119 billion €, of the 440 billion € in guarantees and one of only six AAA-rated sovereigns remaining in the Eurozone (alongside Austria, France, Finland, Luxembourg and the Netherlands).
Financial markets breathed a collective sigh of relief once the court upheld the rescue measures, even though few had expected the Court to strike down the laws authorizing the German guarantees. They had waited for word from Germany’s highest court with a mix of anxiety and hope. The decision removed an important source of uncertainty that had weighted on financial markets over the summer of 2011. At the same time, the judgment also raises several questions with regard to German participation in future rescue efforts, and in particular, how far fiscal integration in the European Union may go without infringing the German constitution.
The threat of constitutional review limited the German government’s room for manoeuvre in the Eurozone crisis, slowed down the policy response and explains some features of the ongoing rescue efforts, such as the structure of the EFSF and the requirement of strict conditionality attached to financial assistance to struggling Eurozone economies. The Constitutional Court has been a central player in the drama surrounding the efforts to resolve the Greek debt crisis. In a telling sign of the court’s importance, Chancellor Merkel postponed her intervention in the general budgetary debate on 7 September in the German Parliament to await the court’s ruling.