Accorinti and others v ECB Posted by Joseph Cotterill on Sep 28 16:20. Big props to Bloomberg for putting this little-known case on the radar (don’t worry, we’ll explain):

Accorinti and others v ECB

Posted by Joseph Cotterill on Sep 28 16:20. Big props to Bloomberg for putting this little-known case on the radar (don’t worry, we’ll explain):

It’s curious – Italian retail investors in Greek sovereign bonds filed a case way back in May to take the European Central Bank to court over its seniority in March’s debt restructuring. We don’t know what their chances are. But it’s one of the first to litigate the violation of the equal treatment of creditors in the PSI.
The initial aim of the case was to annul this decision to accept collateral-enhanced Greek bonds in the central bank’s liquidity operations, waiving minimum credit ratings criteria. That’s a little complicated now, because the ECB already repealed its move back in July.
But in any case, err, the case goes on. As Mariacristina Bulgari, the lawyer leading the case for Studio Legale Sutti, told us:

Studio Legale Sutti is in the process of lodging a second application of non- contractual liability, in accordance with the general principles common to the laws of the Member States, pursuant to art. 340 TFEU against ECB so that makes good any damage caused by in the performance of its duties.

But of course as Bloomberg reports, the ECB asked the European Court of Justice records office for a four-month extension to reply to the case brought against it. Which is pretty interesting, not least because time has gone on such that the decision that’s in question here has already been annulled.
But also because of the ECB’s reasoning:

The Frankfurt-based central bank’s Executive Board faces “unprecedented reorganization,” ECB Director General of Legal Services Antonio Sainz de Vicuna wrote in the letter dated July 11. Also, its legal resources “are being put through severe test as a result of the dramatic worsening of the sovereign debt crisis and of tensions on international markets, with direct implications for the ordinary functions of the ECB.”

Now, as Bloomberg notes, that’s a bad sign given the legal work that would be required to underpin the ECB becoming a financial supervisor in any eurozone banking union.
But frankly, it’s also important when the ECB’s seniority remains a live, legally complex issue. Let’s remind ourselves of the OMT’s feted declaration that its purchases of bonds would accept “the same (pari passu) treatment as private or other creditors”. Of course they’re pari passu! That’s what the bonds say. The central bank remained pari passu in its SMP Greek holdings all the way to the restructuring, when the holdings were suddenly switched into protected bonds, under the aegis of Article 123.
Post-OMT, there are legally tricky issues here. There is a possibility that the ECB could argue, before Accorinti or whoever else might now sue them, that the bond switch didn’t make them legally senior – they were pari passu but simply ‘lucky’ to be transferred into bonds not covered under the PSI. We think arguing that might be awkward when the OMT’s equal status is on the face of it so clear (and hugely positive to bond markets, compared to the damage done by the SMP).
Secondly, if the OMT is actually, really, honestly pari passu now – and inter alia somehow got round the Article 123-centred arguments for why the SMP bonds could never be written down – well, what was the legal basis for SMP seniority in the first place? There seems to be an unresolved incongruity here.
One for those lawyers.
Related link:
Seniority, the SMP, and the OMT – FT Alphaville
This entry was posted by Joseph Cotterill on Friday, September 28th, 2012 at 16:20 and is filed under Capital markets. Tagged with debt restructuring, ecb, Law, PSI, seniority, Sovereign debt

http://ftalphaville.ft.com/blog/2012/09/28/1159831/accorinti-and-others-v-ecb/