English law set to rule new Greek bonds

"The request from our creditors, that the new bonds be governed by English law has not been accepted," Prime Minister Lucas Papademos declared on December 2, speaking to the parliament. A month later, tough negotiations on the private sector involvement (PSI) deal are reportedly forcing the Greek government to cross this red line and accept the issuance of the new bonds under English law, satisfying a key bondholder demand and depriving Greece of a great advantage over its creditors.

Lee Buchheit, a partner at international law firm Cleary Gottlieb Steen & Hamilton, that acts as an advisor to the Greek government on the PSI, had written a few months ago that "by far the greatest advantage that Greece would enjoy in a restructuring of its debt derives from the fact that so much of the debt stock is expressly governed by Greek law (90 per cent or more)." In a paper entitled Greek Debt: The Endgame Scenarios, Buchheit, one of the most prominent lawyers globally in debt restructuring cases, said that "the restructuring could be facilitated in some way by a change to Greek law".

If English law is applied to the new bonds issued under the complex PSI, the Greek side would have to face property confiscation consequences.

According to international law, as well as many national legal systems, when a property is located within the jurisdiction of the legislating state, the latter has the power (de facto or by law) to nationalise or transfer property without compensation. The Wall Street Journal reported on 5 January that "Greece has agreed to consider that the new bonds be governed by English law, which means creditors would be allowed to seize Greek assets if the country fails on its payments".

Tied hands: "If bonds are governed by Greek law, it's going to be easier for Greek legislature to pass a law that simply amends the bonds, which would be much more difficult to do for English law-governed bonds," Steven Friel, a litigator with law firm Brown Rudnick, told Reuters. As Buchheit wrote, "no other debtor country in modern history has been in a position significantly to affect the outcome of a sovereign debt restructuring by changing some feature of the law by which the vast majority of the instruments are governed."

Jurisdiction: "The right to sue in an English court offers investors a greater chance of holding out against a restructuring," The Economist recently wrote. As argued by university professors Stephen Choi (New York), Mitu Gulati (Duke) and Eric Posner (Chicago) in their paper Pricing Terms in Sovereign Debt Contracts: A Greek Case Study with Implications for the European Crisis Resolution Mechanism, "the holder of an English-law bond, because of the supermajority approval provisions in the bond covenants as governed by English law, would have a greater ability to resist any potential restructuring offer than the holder of a Greek-law bond, who basically would have no ability to hold out."