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Home International Economic Law Archive for category "Financial Crisis" (Page 2)

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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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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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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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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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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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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Greek Rescue – Act II

Published on August 12, 2011        Author: 

Michael Waibel is a British Academy Postdoctoral Fellow at the University of Cambridge.

After losing a disastrous war to the Ottoman Empire in 1898, Greece was unable to service its existing debt or to pay an indemnity. The major European powers, alongside private bondholders pushed for the establishment of an international commission of financial control. Greece reluctantly agreed. The commission, consisting of representatives appointed by Austria-Hungary, Italy, Germany, France, Russia, and Britain asserted direct control over the main sources of Greek public revenue to ensure their debt was serviced. They also imposed other limits on Greek fiscal autonomy such as control over public borrowing and the money supply.

Fast-forward 113 years. Greece is at the epicentre of yet another sovereign debt crisis. On May 2010, Eurozone governments and the International Monetary Fund, in Act I of the newest Greek debt crisis, devised a 110 billion € ad hoc assistance package to prevent a possible default by Greece, but it failed convince financial markets. By covering the Greek wound with one insufficient plaster after another for the past 18 months, the Eurozone doctors have allowed the contagion to spread to major Eurozone economies, such as Spain and Italy. Policymakers have been fighting a rearguard action to get ahead of an increasingly systemic debt crisis that threatens Europe’s decade-old single currency itself.

On 21 July 2011, in Act II of the Greek Debt crisis, the European Council proposed emergency measures to shore up financial stability in the Euro area. These measures include additional financing of more than 100 billion € for Greece, lengthening of maturities and reduction in interest rates to about 3.5 percent on existing programmes for Greece, Ireland and Portugal, plus technical assistance on measures to increase competitiveness and structural reforms designed to boost economic growth.

Eurozone leaders also called upon the private sector to contribute, on a voluntary and exceptional basis, to restoring Greek debt sustainability by swapping Greek bonds maturing between 2012 and 2020. Given the implicit threat of a Greek default, it is doubtful whether the exchange is free from elements of coercion – an important factor for the rating agencies assessing the country’s creditworthiness and for whether credit default swaps, essentially insurance against sovereign defaults, will be triggered. If they are, large payment obligations by banks, insurance companies and others could be an additional channel for contagion.

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Dispatch from the Euro Titanic: And the Orchestra Played On [EJIL Editorial]

Published on February 2, 2011        Author: 

These are challenging times for the European Union. Internally, important, even fundamental, decisions are on the agenda as the Union struggles with the Euro crisis and its underlying economic fissures. (Mercifully, the scapegoating of the USA as an escape from facing Europe’s very own breathtaking governmental and private-sector financial and fiscal irresponsibility has all but disappeared – mercifully, since facing reality unflinchingly is a necessary condition for dealing with it effectively.) What is subprime in Europe is the decisional structure of the Union: the European Politburo – President of the Commission, newly-minted President of the Council, tired-old-more-senseless-than-ever rotating Member State Presidency, recycled High Representative answerable to two bosses and thus to none – has proven at best irrelevant to the real actors in you know where (Berlin, Paris, the formidable Merkel, the erratic Sarkozy), at worst distracting – was the able President of the Council’s productive moves really helped by the forced tango with his opposite number at the Commission? About a year after the entry into force of the Treaty of Lisbon, it is clear that at least some of the principal objectives intended by the new decisional structure at the top are turning out to be as ineffective (some claim laughable) as critics anticipated.

Externally, the world sans-Amerique (or at least with a terribly weakened America) is not waiting for Europe either. Here, the non-handshake of Catherine Ashton and Saeed Jalili, Iran’s representative to the resumed talks, was an image emblematic at many levels of the depth of the international challenges and Europe’s worrying circumstance. Read the rest of this entry…

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