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Conversion of Greek debt securities: legal battles should be expected

We know that the conversion of the Greek debt is a bitter pill to swallow for some, above all those who (naively?) thought that the assurances given by the European authorities would not lead to Greece imposing the renegotiation of its public debt only on private investors.

Now, although the Greek government had found a legal remedy with its retroactive Collective Action Clauses (CAC) – which actually led to all the holders of Greek securities having their existing securities exchanged for new securities – the “resistors” – those who were “pushed” into it – are beginning to organise themselves and to prepare to fight back against the Greek State.

It should be noted at this point that there are several types of “resistor”: the “vulture funds”, which bought the distressed debt and which use the legal arm as a negotiating tool and also the traditional investors who had bought the debt when it was issued, or in any event prior to it being in default and who seek to defend their investment. This means that although they are all in the same boat, the terms of their defence may differ.

The principle legal arguments which may be invoked to defend the holders of Greek securities who have been forced to take part in the exchange procedure are as follows:

1 – Breach of international treaties on investments

The Greek law of February 2012 could be considered as a damaging to foreign investors, who are protected by the Washington Treaty. In this regard, the numerous law suits which were filed within the framework of the Argentina default are instructive, whether they are before the ICSID arbitral court or the courts of New York or London. With regard to ICSID, it recently considered itself competent to examine the complaint filed by almost 60,000 holders of Argentinean debt securities. In other words, a sovereign debt security may be protected by the treaty on investments!

2 – Breach of the principle of non-discrimination within the EU

We know that the public creditors, such as the ECB, of course, and also the IMF, have not been affected by the security exchange procedure. This exemption may be classed as discrimination between creditors. However, European treaties protect creditors and refuse any discrimination between them, although this is what Iceland did when it treated Icelandic creditors differently from “foreign” creditors. This is precisely the point: Iceland is now embroiled in law suits before the European court initiated by private creditors for failure to comply with this principle.

3 – Breach of property rights

Another angle could be to examine whether the Greek law of February 2012 breaches property rights inasmuch as it has a retroactive affect on the fundamental rights of the security holders, which is guaranteed both by the Greek Constitution (Article 17) and by the European Convention on Human Rights (Article 1 of the 1st Additional Protocol to the Convention).

It is apparent that all kinds of legal action is starting to blossom and that creditors are getting together to form “class actions”. Greece looks set to face further headaches.

The debate is not an easy one. Choices have to be made between giving a State the means to lift itself up and set off on a better footing and therefore accepting that creditors make sacrifices, and compliance with the elementary principles of law such as the non-retroactivity of laws, equal treatment, non-discrimination and compliance with property rights

3^rd Hubert de Vauplane

Partner chez Kramer Levin Naftalis & Frankel LLP / Associate Professor Paris II Law University

Région de Paris , France

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