OPINION OF THE EUROPEAN CENTRAL BANK of 17 February 2012 on the terms of securities issued or guaranteed by the Greek State (CON/2012/12)

OPINION OF THE EUROPEAN CENTRAL BANK
of 17 February 2012
on the terms of securities issued or guaranteed by the Greek State 
(CON/2012/12)

Introduction and legal basis

On 2 February 2012, the European Central Bank (ECB) received a request from the Greek Ministry of
Finance for an opinion on draft legislative provisions introducing rules for the modification of the terms
of securities issued or guaranteed by the Greek State on the agreement of bondholders. Later on, these
draft provisions have been further revised. This opinion refers to the latest received revised draft
provisions of 16 February 2012 (hereinafter the ‘draft provisions’).
The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the
Functioning of the European Union and on the third and sixth indents of Article 2(1) of Council Decision
98/415/EC of 29 June 1998 on the consultation of the European Central Bank by national authorities
regarding draft legislative provisions1
, as the draft provisions relate to the Bank of Greece and to rules
applicable to financial institutions insofar as they materially influence the stability of financial institutions
and markets. In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the
European Central Bank, the Governing Council has adopted this opinion.
1. Purpose of the draft provisions
The draft provisions authorise the Greek Ministerial Council, on a recommendation of the Minister for
Finance, to launch a process for the modification of the terms of eligible securities, as defined in
paragraph 1 of the first Article of the draft provisions, to determine such eligible securities and, in the
event of an exchange, to define the principal, the interest rate, the duration and the English or other law
governing the new securities to be issued by the Greek State. The Greek Public Debt Management
Agency (PDMA) will invite the holders of eligible securitiesto decide, within a specific deadline, on the
modification of the eligible securities’ legal documentation. This invitation, which is to be notified to the
process manager2
and published on the Internet, will specify: (a) the eligible securities, (b) the terms on
which modifications are proposed, (c) the new content of the terms, (d) any new terms, (e) in case of an
exchange of eligible securities, the terms of the new securities, as determined by the Ministerial Council,
1
OJ L 189, 3.7.1998, p. 42.
2
The process manager will be the Bank of Greece, as operator of the dedicated system for monitoring transactions in
book-entry securities under Law 2198/1994 (hereinafter the ‘System’), including in Greek government bonds.ECB-PUBLIC
2
and any additional terms thereof, (f) the deadline by which bondholders will be invited to decide on the
modification, and (g) other specific issues, including the bondholders’ participation in the decisionmaking process. A quorum of bondholders holding at least half of the aggregate outstanding principal of
all eligible securities is required, together with a majority of at least two thirds of the outstanding
principal of eligible securities held by participating bondholders.
2. General observations
2.1 As a general proposition, it is important that the Member States preserve their ability to honour at
all times their commitments, also with a view to ensuring financial stability. The case of the
Hellenic Republic is exceptional and unique.
2.2 The aim of the draft provisions is to facilitate private sector involvement agreed by the Heads of
State or Government of the euro area Member States on 26 October 20113
, exceptionally and only
for the Hellenic Republic, by introducing into Greek law a procedure to facilitate, in accordance
with collective action clauses (CACs), bondholder negotiation of and agreement to an exchange
offer by the Hellenic Republic for its government bonds. The adoption of the draft provisions,
together with other fiscal and structural measures, will facilitate a possible restructuring of the
sovereign debt of the Hellenic Republic to help place it on a path of debt sustainability.
2.3 The ECB welcomes that the terms of such exchange is the result of negotiations held between the
Hellenic Republic and the institutions representing its bondholders.
2.4 The use of CACs as a procedure to achieve an exchange of bonds is broadly aligned with general
practice. In 2002 the Group of Ten recommended4
to issuers of sovereign bonds the introduction of
CACs to allow amendments to their payment terms with the approval of a supermajority of
bondholders and without a minority being able to obstruct the process. Subsequently, the Member
States agreed in April 2003 that the Member States should include CACs in their international debt
issuance to promote international efforts for orderly restructuring in the event of sovereign debt
crises5
. The terms and conditions of the sovereign debt issued by the Hellenic Republic under nonGreek law normally contain CACs. The Euro Group stated on 28 November 2010 that CACs
should be included in the terms and conditions of all new euro area government bonds.
Article 12(3) of the Treaty establishing the European Stability Mechanism signed by all euro area
Member States on 2 February 2012 provides that following 1 January 2013, CACs must be
included in all new euro area government securities with maturity above one year.
3
Euro Summit Statement, Brussels, 26 October 2011, available on the website of the Council of the European Union at
www.consilium.europa.eu.
4
Report of the G-10 Working Group on Contractual Clauses, 26 September 2002, available on the website of the Bank for
International Settlements at www.bis.org.
5
See ‘Common understanding on implementing the EU commitment regarding the use of Collective Action Clauses
(CACs)’, available at http://europa.eu/efc/sub_committee/pdf/common_understanding_cacs_en.pdf. See also
‘Implementation of the EU commitment on Collective Action Clauses in documentation of International Debt Issuance’,
available at http://europa.eu/efc/sub_committee/pdf/cacs_en.pdf.ECB-PUBLIC
3
2.5 The explanatory memorandum to the draft provisions provides that “The public sector (ΕU, ECB)
has demonstrated its support to the programme of reforms of the Greek economy, including the
earmarking of an amount of EUR 30 billion for the restructuring of debt held by private sector
creditors; it has also demonstrated, via the Eurosystem and the European Central Bank’s
programme for intervening in the bond markets SMP, its commitment to the stability of the
European financial sector. In the context of materializing the above-mentioned commitments and
while waiting for the exchange to be proposed to private sector creditors, the Hellenic Republic
acknowledges the above support of the European Central Bank and the other Eurosystem members
considering the higher interests of the Greek economy and the continued functioning of the
Eurosystem monetary policy framework.”
2.6 The ECB notes that it remains the sole responsibility of the Government of the Hellenic Republic
to take the necessary action that will ultimately ensure its debt sustainability.
3. Definition of bondholders
The draft provisions define bondholders as participants in the System rather than as the beneficiaries of
the bonds. However, they do not explain how System participants are to vote for the modification of the
terms of eligible securities, including where they have no active portfolio management rights over them,
or how the voting is to take place, both procedurally and substantively. For reasons of legal certainty, and
with a view to protecting the legitimate expectations of the bondholders of eligible securities, the draft
provisionsshould include such details.
4. Disenfranchisement
Paragraph 5 of the first Article of the draft provisions provides for the disenfranchisement of eligible
securities directly owned by the Greek State, and also in the case of eligible securities guaranteed by the
Greek State, eligible securities directly owned by the issuer. The ECB understands that, as provided for in
the explanatory memorandum to the draft provisions, this provision does not disenfranchise certain public
sector entities not forming part of the Greek State, i.e. public law legal persons, local government
authorities or private law legal persons of the public sector. The Report of the G-10 Working Group on
Contractual Clauses6
recommended a mechanism for disenfranchising bonds directly or indirectly owned
or controlled by the sovereign issuer, and its public sector instrumentalities, to address creditor concerns
about manipulation of votes by a sovereign. The disenfranchisement provisions of the draft provisions
could be widened to protect the integrity of the voting process.
6
See Report of the G-10 Working Group on Contractual Clauses, p. 5.ECB-PUBLIC
4
5. Calculation method
The draft provisions do not stipulate the calculation method for the outstanding principal of eligible
securities issued as zero coupon, stripped or index-linked bonds. The matter is, instead, left to the
PDMA’s invitation. For reasons of legal certainty, reliable statistical measurement of the debt and
protection of the legitimate expectations of the bondholders, the draft provisions should specify the
calculation method for the above types of eligible securities.
This opinion will be published on the ECB’s website.
Done at Frankfurt am Main, 17 February 2012.
[signed]
The President of the ECB
Mario DRAGHI

http://www.ecb.int/ecb/legal/pdf/en_con_2012_12_f_sign.pdf