The legal consequences of sovereign insolvency – a review of creditor litigation in Germany following the Greek debt restructuring
| Published date | 01 June 2017 |
| Date | 01 June 2017 |
| DOI | 10.1177/1023263X17722349 |
| Subject Matter | Articles |
Article
The legal consequences
of sovereign insolvency – a
review of creditor litigation
in Germany following the
Greek debt restructuring
Sebastian Grund*
Abstract
This article analyses three seminal instances of bondholder litigation before German municipal
courts following the Greek sovereign debt restructuring of 2012. While the haircut imposed on
private bondholders led to a significant reduction of the country’s debt level in 2012, thousands of
German investors subsequently challenged the Greek government’s decision before German
courts. In this context, as this article highlights, even within a single jurisdiction, courts may hold
very different views as to which debt management measures by a sovereign borrower ought to be
considered ‘public’ legal acts – thus barring foreign bondholder suits – and which are ‘commercial’
legal acts, where litigation is a feasible legal avenue for disgruntled creditors to recover losses. In
sum, however, German courts were reluctant to grant broad enforcement remedies to private
bondholders, essentially vindicating the Greek government’s strategy of rewriting local law and
retrofitting so-called ‘collective action clauses’ to increase bondholder participation in the
restructuring. Against this background, this article discusses some of the decisions’ potential
implications, such as the increased prospects for other crisis-stricken governments to successfully
repeat a Greek-style debt restructuring as well as the future treatment of foreign and domestic-law
public debt both by courts and market participants.
Keywords
sovereign debt restructuring, Greek debt crisis, economic and monetary union, German
bondholder litigation, sovereign immunity, Brussels I Regulation
* University of Vienna, Austria
Corresponding author:
Sebastian Grund, University of Vienna, Austria.
Email: sebastian.grund@univie.ac.at
Maastricht Journal of European and
Comparative Law
2017, Vol. 24(3) 399–423
ªThe Author(s) 2017
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DOI: 10.1177/1023263X17722349
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1. Introduction
In late 2009, Greece’s new Prime Minister – George Papandreou – publicly announced that the
country’s budget deficit was likely to hit 12%of the GDP in 2010.
1
However, it took months before
it became clear that Greece’s level of outstanding public debt had grown to unsustainable levels. In
mid-2010, the EU – supported by the International Monetary Fund (IMF) and the European Central
Bank (ECB) – finally reacted to the looming threat of a full-blown sovereign debt crisis in Europe
by putting together its first Greek rescue package.
2
Despite a mammoth €110 billion cash injec-
tion, financing conditions further deteriorated over the course of the following months and addi-
tional external financial rescue measures soon became inevitable.
3
Eventually, two years after Greece’s financial predicaments had come to the forefront of the
European economy, Greece restructured a significant portion of its outstanding debts under the
supervision and guidance of EU policymakers and the IMF. In other words, Greece imposed a so-
called ‘haircut’ on the holders of Greek sovereign debt instruments, thereby reducing the value of
financial claims held against Greece. Because the official sector had previously injected hundreds
of billions of euros into the ailing Greek economy, the so-called ‘Troika’ (consisting of the
European Commission, the ECB and the IMF) insisted on comprehensive ‘Private Sector Involve-
ment’ (PSI).
4
This meant that the debt workout was restricted to th e claims of private-sector
creditors rather than encompassing the entire universe of debt owed by Greece.
Consequently, Greece faced the burdensome challenge of convincing private investors that it
could no longer repay all of its debt obligations and that a debt cut was inevitable.
5
From the very
beginning it was clear that implementing a debt cut, of the size envisaged by the Troika, would
require extraordinary legal measures. Imperatively, in order to shrink the mountain of outstanding
debt, the solution had to strike a reasonable balance between managing the risks of bondholder
litigation and forcing significant losses upon Greece’s private-sector creditors. This was achieved
by retrofitting so-called Collective Action Clauses (CACs) to the bulk of government bonds
1. This led to an upward revision of the deficit projection by Eurostat from 3.7%to 12.5%. See, Eurostat, ‘Provision of
Deficit and Debt Data for 2008 – Second Notification’, http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-
22102009- AP/EN/2-22102009-AP-EN.PDF.
2. See, International Monetary Fund (IMF),’Europe and IMF Agree €110 Billion Financing Plan With Greece’, http://
www.imf.org/external/pubs/ft/survey/so/2010/car050210a.htm. For more details on the Eurogroup’s ‘First Economic
Adjustment Programme for Greece’, which totalled €80 billion to be disbursed over a period of 3 years see, European
Commission, ‘The Economic Adjustment Program for Greece’, http://ec.europa.eu/economy_finance/publications/
occasional_paper/2010/pdf/ocp61_en.pdf.
3. Greek sovereign bonds spread vis-a`-vis German government bonds (‘Bunds’), used to measure the tightness of financing
conditions for states, rose to unprecedented levels. Compare R.A. De Santis, ‘The Euro Area Sovereign Debt Crisis –
Safe Haven, Credit Rating Agencies and the Spread of the Fever From Greece, Ireland and Portugal’, European Central
Bank Working Paper Series No. 1419 (2012), https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1419.pdf?20b5463
a06e46d4321d81b1f8fb1990 f.
4. The political economy of the Greek debt crisis is compellingly described and analysed in P. Blustein, Laid Low: The IMF
and the Euro Area Crisis (CIGI Press, 2016).
5. Most creditors understood that the economic predicaments facing Greece in 2012 necessitated a sizeable haircut,
especially to the country’s enormous GDP-to-debt ratio which was north of 160%. Since the Greek government could
not, however, promise equal treatment to all creditors, it had to disappoint certain creditors by reducing the amount of
funds available for distribution among them (thereby increasing the size of the haircut for each of them). Crucially,
Greece had to refrain from imposing a haircut on its biggest creditor, the European Central Bank, due to the prohibition
of monetary financing enshrined in the EU Treaties; compare, Case T-79/13 Accorinti and Others v. European Central
Bank, EU:T:2015:756.
400 Maastricht Journal of European and Comparative Law 24(3)
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