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Home International Economic Law Archive for category "Financial Crisis"

Iceland not responsible for the liabilities of its deposit insurance scheme

Published on January 28, 2013        Author: 

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).

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Filed under: EJIL Analysis, European Union, Financial Crisis, State Responsibility
 

ITLOS order Ghana to release Argentine navy ship

Published on December 17, 2012        Author: 

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…

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Filed under: EJIL Analysis, Financial Crisis, International Law and Domestic Law, International Tribunal for the Law of the Sea, Law of the Sea, State Immunity
 

Argentina’s Sovereign Debt Default Cases: Some Recent Developments in a Continuing Saga

Published on November 9, 2012        Author: 

More than ten years have passed since Argentina defaulted on its external debt obligations in December 2001. However, the repercussions of the Argentine financial crisis continue to contribute to the development of international law. This brief note provides a short overview of the most recent decisions of different domestic courts arising out of this Argentinian saga: NML Ltd et al. v the Republic Argentina before the US Court of Appeals decided on 26th October 2012 (see reporting here, here, here and here), and the decision of the Ghanaian Commercial Court of 2nd October 2012 (see Opinio Juris, BBC, Al Jazeera,  and elsewhere: here, and here), while reference will be made to the NML v Argentina case, before the UK Supreme Court which was decided on 6th July 2011 (see reporting here and here).

These three cases pronounced on inter-related, but distinct, legal issues (enforcement of foreign awards, state immunity, and non-discriminatory treatment of bondholders) arising out of the Argentine decision to default on its external debt. In combination, they have far-reaching legal implications. It is noteworthy that different courts from around the globe repeatedly ruled in favour of bondholders and against Argentina. Although Argentina in and out of court has invoked political arguments, such as the implications of the court’s approach to the Eurozone crisis resolution efforts (in NML v Argentina before the US Court of Appeals) and the nature of the claimants as ‘vulture funds’ (see here reacting to the Ghanaian Commercial Court ruling; see also Lord Phillips and Lord Collins in NML v Argentina  [2011] UKSC 31, paragraphs 1 and 104-107 respectively), domestic courts consistently prioritise a more legal or stricto sensu approach and promote the Rule of Law in international economic and financial relations.

Background and US Proceedings

After the default in 2001, Argentina made exchange offers to holders of bonds, which were governed by the Fiscal Agency Agreement (FAA). Read the rest of this entry…

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Filed under: EJIL Analysis, Financial Crisis, International Economic Law, International Law and Domestic Law, State Immunity
 

The German Constitutional Court and the Euro-Crisis: The Emperor‘s New Clothes?

Published on September 20, 2012        Author: 

 Daniel Thym is Professor of Public, European and International Law at the University of Konstanz

Domestic German debates about the euro-crisis have had an unreal character so far. In the face of an economic crisis with global repercussions, the German public has been fascinated by the role of the Constitutional Court whom they admire. A vast majority of Germans trust that the country’s highest justices will steer the euro-debate through troubled waters with legal arguments. This confidence in the ability of Germany’s top constitutionalists, including several public law professors, was always bound to lead to disappointment.

It is true that the German Constitutional Court cannot be held responsible for the excessive media hype (or indeed opinion polls) about its role. However, it has to shoulder some responsibility. In recent years, the Court’s Second Senate had nourished the expectation that its interpretation of the principle of democracy was a lodestar for rescue operations. The debate reminded me of the fairy tale ‘The Emperor‘s New Clothes’. Those who aspire to ever more prestigious garments as a sign of power and wisdom risk being found to be naked at the end of the day. This applies to the German judicial ‘sovereign’ in the same vein as to the entourage who longed to gain from the prestige of their glorious ruler.

The Court’s latest judgment on the European Stability Mechanism (ESM) (also discussed by Michael Waibel here) and related instruments is an excellent demonstration why the desire for the pomp and circumstance of imperial times, remains an illusion (at least in Germany). The lesson is evident: the time has come to recalibrate the (legal) debate on euro rescue operations in Germany and beyond. Read the rest of this entry…

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Filed under: EJIL Analysis, European Union, Financial Crisis
 
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Karlsruhe gives green light for German ESM ratification

Published on September 12, 2012        Author: 

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.

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Filed under: EJIL Analysis, European Union, Financial Crisis
 

Dublin, Karlsruhe and Luxembourg in dialogue

Published on August 6, 2012        Author: 

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.

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Filed under: EJIL Analysis, European Union, Financial Crisis
 

ECHR leaves Northern Rock shareholders out in the cold

Published on August 3, 2012        Author: 

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.

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Filed under: EJIL Analysis, European Convention on Human Rights, European Court of Human Rights, Financial Crisis
 

Review of Expert Determinations of the International Swaps and Derivatives Association by Domestic Courts

Published on May 2, 2012        Author: 

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…

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Filed under: EJIL Analysis, European Union, Financial Crisis, International Law and Domestic Law
 

Integration Through Fear

Published on April 3, 2012        Author: 

Quos Deus vult perdere prius dementat! The manner in which Europe is addressing its grave crisis seems to be validating this piece of wisdom attributed to Euripides, Seneca and others.

One manifestation is an argument which has become prevalent. In his very first speech as Premier elect to the Italian Senate, Mario Monti warned that ‘the end of the Euro would unravel the single market, its rules, its institutions, and would take us back to where we were in the 1950s’. The same nonsensical scare tactics – if the Euro fails, so does Europe as a whole – have been used by all major European leaders, from Barroso and van Rompuy to the Merkozy twins.  

The argument is, of course, simply false. The Single Market, the most singular and enduring economic achievement of Europe, operates today across the Euro divide. Ten of the 27 Member States do not belong to the Euro and in some of these countries their currency is not even pegged to the Euro. Sure, fixed exchange rates facilitate the functioning of the market. And a break up of the Euro will be incredibly messy and wreak havoc within that market. But unless one turns this into a self-fulfilling wish, and that is rapidly becoming the case, the actual existence of the Single Market never was, and still is not, dependent on some or all of its Members having a single currency.

Why is this nonsense peddled? Linking the fate of the Euro to the very existence of the Union offers a powerful tool with which to bludgeon one’s opponents and public opinion as a whole. Thus, each of its proponents uses it to advance positions and policies which at times are even at odds with each other.  

Beyond its falsity, it is a reckless tactic, a Faustian compact, deeply injurious, and one which will return to haunt us regardless of the fate of the Euro. Read the rest of this entry…

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Filed under: Editorials, European Union, Financial Crisis
 
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Eurozone Crisis: All Eyes on Karlsruhe

Published on October 17, 2011        Author: 

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.

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Filed under: EJIL Analysis, European Union, Financial Crisis
 
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