The Greek Bond Haircut:
Public and Private International Law and European Law Limits to Unilateral Sovereign Debt Restructuring
ABSTRACT: The paper examines the bond haircut which was imposed this March on outstanding Greek bonds by a retroactive legislative insertion of collective action clauses into the terms of the debt. Various benchmarks are discussed and the legality of the measure assessed against them. In summary, the findings may be recapitulated as follows: The haircut could be done using private international law techniques, but its lawfulness under public international law is questionable. This is because the cut might be regarded, under both customary and treaty-based international law (where bilateral and multilateral investment treaties exist), as an expropriation the compensation for which might be legally challenged. In spite of a considerable lack of clarity about the precise computation of the market value which forms the basis for the quantification of this compensation, author is of the opinion that the new bonds into which outstanding Greek debt was exchanged do not meet this standard. The paper also discusses a closely related yet distinct concept referred to as sanctity of contract, which also casts doubt on the lawfulness of the haircut; but this doctrine is less firmly established in international custom. The procedural remedies available to enforce this substantive law position are limited, however, with the best prospects for success lying in ICSID arbitral procedures.
The paper goes on to discuss the legality under European law. It reaches the conclusion that the cut was lawful under the European Convention on Human Rights and EU fundamental rights, owing to the less stringent compensation requirements in these systems. The analysis continues by discussing the cut in the light of the EU’s internal market rules, namely the free movement of capital, and concludes that it is convincing to argue in favour of its lawfulness by this benchmark.