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The ‘Haircut’ of Public Creditors under EU Law

Published online by Cambridge University Press:  06 June 2016

Armin Steinbach
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Abstract

Haircut of public creditors as next step in the escalation of the euro debt crisis? – Exploring the boundaries set by the EU Treaty on debt restructuring – Limitations imposed by no-bailout clause and prohibition of monetary state financing – Standards set in Pringle and Gauweiler – Haircut on nominal debt infringes no-bailout clause – Active involvement by European Central Bank violates ban on monetary state financing – Other forms of ‘soft haircuts’ may be compatible with EU law

Keywords

European Unionsovereign debthaircutESM
Type
Articles
Information
European Constitutional Law Review , Volume 12 , Issue 2 , September 2016 , pp. 223 - 239
Copyright
Copyright © The Authors 2016 

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Footnotes

*

Senior Research Fellow at the Max Planck Institute for Research on Collective Goods in Bonn (Germany); Associate Member, Nuffield College (Oxford University); [email protected]. The article builds on the author’s German contribution published in Juristenzeitung 2013, p. 1148-1152.

References

1 Instructively, Merino, A. de Gregorio, ‘Legal Developments in the Economic and Monetary Union During the Debt Crisis: The Mechanisms of Financial Assistance’, 49 CMLRev (2012) p. 1613-1646 Google Scholar.

2 ECJ 27 November 2012, Case C-370/12, Pringle v Ireland (henceforth: Pringle case); Adam, S. and Mena Parras, F. J., ‘The European Stability Mechanism through the Legal Meanderings of the Union’s Constitutionalism: Comment on Pringle’, 38 ELRev (2013) p. 848 at p. 860 Google Scholar; Borger, V., ‘How the Debt Crisis Exposes the Development of Solidarity in the Euro Area’, 9 EuConst (2013) p. 7 at p. 16-34 Google Scholar; see also Louis, J.-V., ‘Guest editorial: The no-bailout clause and rescue package’, 47 CMLRev (2010) p. 971 Google Scholar; Athanassiou, P., ‘Of Past Measures and Future Plans for Europe’s Exit from the Sovereign Debt Crisis: What is Legally Possible (and What is Not)’, 36 ELRev (2011) p. 558 Google Scholar; Palmstofer, R., ‘To Bail Out or Not to Bail Out? The Current Framework of Financial Assistance for Euro Area Member States Measured against the Requirements of EU Primary Law’, 37 ELRev (2012) p. 771 at p. 781 Google Scholar.

3 ECJ 16 June 2015, Case C-62/14, Gauweiler and Others v Deutscher Bundestag (henceforth: Gauweiler case). On the compatibility of Outright Money Transactions programmes with EU law, see Steinbach, A., ‘The compatibility of the ECB’s sovereign bond purchases with EU law and German constitutional law’, 39 Yale Journal of International Law Online (2013) p. 15 Google Scholar; Borger, V., ‘Outright Monetary Transactions and the stability mandate of the ECB: Gauweiler’, 53 CMLRev (2016) p. 139-196 Google Scholar; Siekmann, H., The Legality of Outright Monetary Transactions (OMT) of the European System of Central Banks 20 (Institute for Monetary and Financial Stability, Working Paper Series No. 90 2015)Google Scholar.

4 IMF, Greece, IMF Country Report No. 16/30, May 2016, <http://www.imf.org/external/pubs/ft/scr/2016/cr16130.pdf>, visited 26 May 2016 cf. also Z. Darvas and P. Hüttl, The Long Haul: Debt Sustainability Analysis (Bruegel Working Paper 2014/06).

5 Witte, A., ‘Greek Bond Haircut: Public and Private International Law and European Law Limits to Unilateral Sovereign Debt Restructuring’, 9 Manchester J. Int’l Econ. L. (2012) p. 307 Google Scholar; Glinavos, I., ‘Haircut Undone? The Greek Drama and Prospects for Investment Arbitration, Journal of International Dispute Settlement’, 5 Journal of International Dispute Settlement (2014) p. 475 CrossRefGoogle Scholar; IMF, Sovereign Debt Restructuring - Recent Developments and Implications for the Fund’s Legal and Policy Framework, 26 April 2013, <www.imf.org/external/np/pp/eng/2013/042613.pdf>, visited 17 May 2016.

6 Zettelmeyer, J. et al., ‘The Greek Debt Restructuring: An Autopsy’, 28 Economic Policy (2013) p. 513-563 CrossRefGoogle Scholar; see also von Bogdandy, A. and Goldmann, M., ‘Sovereign Debt Restructurings as Exercises of International Public Authority: Towards a Decentralized Sovereign Insolvency Law’, in C. Esposito et al. (eds.), Sovereign Financing and International Law (Oxford University Press 2013) p. 39-70 Google Scholar.

7 On the various episodes of debt restructuring in general see Sturzenegger, F. and Zettelmeyer, J., Debt Defaults and Lessons from a Decade of Crises (MIT Press 2007)Google Scholar.

8 There remains, however, considerable disagreement on the methodology to compute the debt sustainability, see Schumacher, J. and Weder di Mauro, B., Diagnosing Greek debt sustainability: Why is it so hard? (Brookings Papers on Economic Activity, 26 August 2015)Google Scholar.

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10 While the terms ‘liable for’ and ‘assume’ are used in Article 125 TFEU, the Court refers in Pringle to the term that countries ‘remain responsible to its creditors for its financial commitments’, see Pringle case, para. 138. Throughout this analysis we use the terms ‘remain responsible’, ‘be liable for’ and ‘assume commitments’ as synonyms describing when one country takes over or extinguishes the debt of another country.

11 Pringle case, para. 139.

12 It is admitted that from a purely positivistic viewpoint, a haircut is not equivalent to the assumption of debt as the debt ceases to exist. However, considering the aim of Article 125 TFEU to prevent debt relief in order to maintain market pressure, a haircut (i.e. renouncing of the repayment of debt) has the same effect as one Member States assuming the debt that another Member State has vis-à-vis a third institution.

13 See Steinbach, supra n. 3; Louis, supra n. 2, p. 971; Athanassiou, supra n. 2, p. 558.

14 Further instructive reading on this discussion can be found in Louis, supra n. 2, p. 971; Palmstofer, supra n. 2, p. 781; Adam and Mena Parras, supra n. 2, p. 860; Borger, supra n. 2, p. 16-34; Eichengreen, B., ‘The Euro’s Never-Ending Crisis’, 110 Current History (2011) p. 91 Google Scholar.

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16 Schorkopf, F., ‘Gestaltung mit Recht’, 136 Archiv öffentlichen Rechts (2011) p. 323 at p. 341 Google Scholar.

17 Häde, U., ‘Die europäische Währungsunion in der internationalen Finanzkrise – An den Grenzen europäischer Solidarität?’, 6 Europarecht (2010) p. 856 Google Scholar.

18 Calliess, C., ‘Perspektiven des Euro zwischen Solidarität und Recht – Eine rechtliche Analyse der Griechenlandhilfe und des Rettungsschirms ’, 2 Zeitschrift für europarechtliche Studien (ZEuS) 2011, p. 213 Google Scholar at p. 250 ff.

19 Pringle case, para. 130; see also Borger, V., ‘The ESM and the European Court’s Predicament in Pringle’, 14 German Law Journal (2013) p. 113 Google Scholar at p. 117.

20 Fabbrini, F., ‘The Euro-Crisis and the Courts: Judicial Review and the Political Process in Comparative Perspective’, 32 Berkeley Journal of International Law (2014) p. 98 Google Scholar.

21 Pringle case, para. 136; , Craig, ‘Pringle: Legal Reasoning, Text, Purpose and Teleology’, 20 Maastricht Journal of European and Comparative Law (2013) p. 3 CrossRefGoogle Scholar.

22 See also Adam and Mena Parras, supra n. 2, p. 860; Borger, supra n. 2, p. 16-34; Eichengreen, supra n. 14, p. 91.

23 Pringle case, para. 142.

24 Pringle case, para. 137.

25 Pringle case, para. 136.

26 Pringle case, para. 139.

27 On this, see also Calliess, C., ‘Der ESM zwischen Luxemburg und Karlsruhe’, 32 NVwZ (2013) p. 103 Google Scholar.

28 Pringle case, para. 138.

29 Pringle case, para. 136.

30 ECJ 17 September 2007, Case T-201/04, Microsoft v EC Commission; see also ECJ 16 March 2004, Case T-118/96, para. 67 (anti-dumping measures); Steinbach, supra n. 3, p. 27.

31 Gauweiler case, para. 68.

32 Nettesheim, M., ‘Europarechtskonformität des Europäischen Stabilitätsmechanismus’, 66 NJW (2013), p. 16 Google Scholar.

33 Gauweiler case, para. 74.

34 BVerfG 7 September 2011, Case No. 2 BvR 987/10, 2 BvR 1485/10, 2 BvR 1099/10, para. 181.

35 BVerfG 12 September 2012, Case No. 2 BvR 1390/12, paras. (1-319), para. 232.

36 BVerfG 12 September 2012, Case No. 2 BvR 1390/12, paras. (1-319), para. 233. By contrast, the German Constitutional Court does not explicitly mention conditionality as a prerequisite.

37 For a general take on the moral hazard implications of Article 125 TFEU, see A. Steinbach, ‘Effect-based analysis in the Court’s jurisprudence on the euro crisis’, European Law Review, forthcoming. Kerber, M. C. and Städter, S., ‘Ein Beitrag zum Individualrechtsschutz gegen Rechtsverstöße der EZB’, 14 EuZW (2011) p. 536 Google Scholar; Frenz, W. and Ehlenz, C., ‘Europäische Wirtschaftspolitik nach Lissabon’, 9 GewArch (2010) p. 329 Google Scholar.

38 Nettesheim, supra n. 32, p. 16, who casts doubt on this connection with regard to the European Stability Mechanism.

39 Clearly, difficulties in drawing such a comparison result from the fact that market-based bond spreads do not reflect a state’s fundamentals but are rather determined by negative self-fulfilling market sentiments, see De Grauwe, P. and Ji, Y., ‘Self-fulfilling crises in the Eurozone: An empirical test’, 34 Journal of International Money and Finance (2013) p. 15-36 CrossRefGoogle Scholar.

40 Pringle case, para. 139.

41 On the concept of debt sustainability, see, for instance, IMF and World Bank, The Challenge of Maintaining Long-Term External Debt Sustainability, 20 April 2001, <www.imf.org/external/np/hipc/2001/lt/042001.pdf>, visited 17 May 2016.

42 On debt cuts for private creditors, see A. C. Porzecanski, Behind the Greek default and restructuring of 2012 (MPRA Paper No. 44178 2012).

43 Gauweiler case, para. 74.

44 On the diverging approaches in assessing debt sustainability see Schumacher, J. and di Mauro, Beatrice Weder, Diagnosing Greek debt sustainability: Why is it so hard? (Brookings Papers on Economic Activity, 26 August 2015)Google Scholar.

45 In this vein, see A. von Bogdandy et al., supra n. 9, p. 6.

46 For an analysis of the Court’s effect-based approach see Steinbach, A., ‘Effect-based analysis in the Court’s jurisprudence on the euro crisis’, European Law Review, forthcomingGoogle Scholar.

47 On the basis of Art. 2 TFEU, solidarity is a foundational value of the EU. For express references to the principle of solidarity, see Arts. 21 and 24 paras. 2 and 3 TFEU, as well as Arts. 67, 80, 122, 194 and 222 of the TFEU; Boutayeb, C., ‘La solidarité, un principe immanent au droit de l´Union européenne’, in C. Boutayeb (ed.), La solidarité dans l´Union européenne (Dalloz 2011) p. 5-37 Google Scholar.

48 On this, see Calliess, supra n. 18, p. 222 and 268; see also Domurath, I., ‘The Three Dimensions of Solidarity in the EU Legal Order: Limits of the Judicial and Legal Approach’, 35 European Integration (2013) p. 459-475 CrossRefGoogle Scholar.

49 More generally see Klamert, M., The Principle of Loyalty in EU Law (Oxford University Press 2014)CrossRefGoogle Scholar.

50 On the solidarity dimension of the relevant norms in Art. 122 TFEU and Art. 125 TFEU, see Hilpold, P., ‘Understanding solidarity within EU law: An analysis of the “islands of solidarity” with particular regard to Monetary Union’, 34 Yearbook of European Law (2015) p. 257-285 Google Scholar.

51 On the relationship of the solidarity principle and the interpretation of Art. 125 TFEU, see Opinion of Advocate General Kokott in the Pringle case, paras. 142-143. In her view, a wide interpretation of Art. 125 TFEU banning all kind of financial support would lead to undesirable results.

52 ECB, Decision of 14 May 2010 (ECB/2010/5), OJ 2010, L124/8.

53 European Central Bank, Press Release, Technical Features of Outright Monetary Transactions, 6 September 2012, <www.ecb.europa.eu/press/pr/date/2012/html/pr120906_1.en.html>, visited 17 May 2016.

54 Gauweiler case; Steinbach, supra n. 3; differently Siekmann, supra n. 3.

55 Borger, supra n. 3; Steinbach, supra n. 3.

56 Gauweiler case, para. 68; on the wide margin of the European Central Bank see also Steinbach, supra n. 3, p. 27.

57 Gauweiler case, para. 74.

58 More generally on the marginal review standard of the proportionality analysis undertaken by the ECJ, see Türk, Judicial Review in EU Law (Edward Elgar Publishing 2010) p. 137.

59 Gauweiler case, para.125.

60 Cf. Art. 18.1 ECB Statute.

61 See also F. Schorkopf, Stellungnahme Europäische Zentralbank, 16 January 2013, p. 52; Sester, P., ‘Die Rolle der EZB in der europäischen Staatsschuldenkrise’, 3 EWS (2012), p. 85 Google Scholar.

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63 IMF, Greece, IMF Country Report No. 16/130, May 2016, <www.imf.org/external/pubs/ft/scr/2016/cr16130.pdf>, visited 26 May 2016.

64 Opinion of Advocate General Villalón in Gauweiler case, para. 235.

65 This analysis extends to the Eurosystem’s expanded asset purchase programme. The programme was launched on 22 January 2015 and foresees combined monthly purchases of € 60 billion in public and private sector securities including the public sector purchase programme of marketable debt instruments issued by euro area central governments. All these entities are public sector entities and are thus subject to the ban of monetary financing under Article 123 TFEU, which prohibits the extension of direct credit to public sector entities or sovereigns.

66 Zettelmeyer et al., supra n. 6, p. 550, 554.

67 This was based on the conclusions of the European Council of 24/25 March 2011 and developed by the Economic and Financial Committee (EFC) on 18 November 2011, see <europa.eu/efc/sub_committee/cac/cac_2012/index_en.htm>, visited 17 May 2016.

68 Similarly, Zilioli, 23 MJ 1 (2016) p. 171 at p. 176.

69 On the task-sharing among the ECB and the national central banks see Steinbach, A., ‘The Lender of Last Resort in the Euro Area’, 53 CMLRev (2016) p. 361 at p. 365-366 Google Scholar.

70 Hofmann, C., ‘Sovereign-Debt Restructuring in Europe Under the New Model Collective Action Clauses’, 49 Texas International Law Journal (2014) p. 383 Google Scholar at p. 417.

71 See the Eurogroup statement on Greece, 27 November 2012, <www.consilium.europa.eu/en/workarea/downloadAsset.aspx?id=19043>, visited 17 May 2016, p. 2.

72 Regulation (EU) No. 2015/1017 of the European Parliament and of the Council of 25 June 2015 on the European Fund for Strategic Investments, the European Investment Advisory Hub and the European Investment Project Portal and amending Regulations (EU) No. 1291/2013 and (EU) No. 1316/2013 – the European Fund for Strategic Investments, OJ 2015, L 169/1.

73 Eurogroup statement, 21 February 2012, <www.efsf.europa.eu/attachments/2012-02-21%20Eurogroup%20statement%20Bailout%20for%20Greece.pdf>, last visited 25 October 2015.

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