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Could these events impel Greece to default on its debts, and to withdraw from the Eurozone?
in other Eurozone capitals, impelled by the significant exposure of the financial system to Greek sovereign debt. But as the Wall Street Journal aptly put the matter on 17 June, What if the Greeks Decide They dont Want to be Rescued? Tired of austerity programmes and protests, the public may just decide that a default and Euro withdrawal are the preferable options even though they would result in the loss of aid from the European Union and the International Monetary Fund. It should be said that not all commentators share this pessimistic outlook. A piece published in the UKs Financial Times on 19 June (Against the odds, the Euro will scrape through) adopts the contrary position. A purely legal analysis cannot make much of these competing arguments. If, however precariously, the Eurozone survives in its present form, then few issues of an essentially legal character will arise from the preservation of the status quo. But a splintering of the Eurozone would involve new and uncharted legal territory. Despite their novelty these issues are by no means theoretical and may have direct and massive consequences for creditors holding Greek sovereign or corporate obligations. Accordingly, the purpose of this briefing is to consider some of the legal implications of a Greek departure from the Eurozone.
complete withdrawal, there are various procedural formalities and details would remain to be negotiated. Beset by crisis and the spectre of default, it is likely that a Greek departure would be precipitous and untidy, with the treaty niceties being substantially disregarded. That this would involve a positive breach of Greeces treaty obligations is also a matter which is likely to receive limited immediate attention in the context of a major crisis. A Greek withdrawal is thus likely to be unlawful but, as noted earlier in this briefing, it might happen anyway. In that situation, the Greek Government would have to introduce a replacement currency referred to for convenience as the new drachma. The currency will have to be created by a new Greek law, which would have to provide a substitution rate for the conversion of Euro obligations to the new drachma. The application of this law creates difficulties of a particularly acute kind, and these are considered under The Currency of Payment, below. It may be noted in passing that a Greek departure from the EU may have many other consequences, especially in the context of the four freedoms created by the treaties (including free movement of capital, workers, goods and services). These are huge subjects on their own, and the present briefing is accordingly confined to the consequences for monetary or financial obligations.
This will generally not be the case, because obligations of payment remain valid notwithstanding a change in the currency of denomination. International financial contracts expressed in Euro will therefore remain valid and effective, notwithstanding a Greek withdrawal from the single currency zone.
to simple solutions. But cases that fall into dispute will inevitably be more marginal. Often, such cases may involve Greek debtors but have some significant international element e.g., the contract is governed by English law, or payment is to be made outside Greece. In addition the currency of payment question may be influenced by the forum in which the question arises for decision. In particular: (a) The law creating the new drachma will be directly binding on the Greek courts and will thus have to be applied by those courts in a significant number of cases. It is therefore likely that Greek courts would redenominate contracts into the new currency unit, thus favouring the position of debtors and obligors; and (b) In contrast, courts sitting in other countries will not be directly bound by the new Greek currency law, and will only have to give effect to the new drachma conversion if the parties intended to contract by reference to internal Greek monetary rules. In most cases of this kind that might fall for determination by an English court, it is suggested that the court would usually come to the conclusion that the contract remained outstanding in Euro and thus had to be performed in that currency. The English courts would thus tend to favour the position of the creditor. There are two possible reasons for this approach: (a) First of all, an English court would only become concerned with obligations of a Greek obligor if there were some significant international angle to the dispute e.g. a loan agreement governed by English law and syndicated amount a group of London banks. In such a case, the court is likely to hold that there is no clear choice of the internal laws of Greece to determine monetary questions and, on that basis, the agreement remains dominated in Euro; (b) Secondly, and as a matter of wider principle, the English court may
disregard the new Greek monetary laws and the new drachma altogether. As noted above, the new monetary unit is likely to be created in contravention of the single currency rules in the EU treaties. Given that the United Kingdom is itself a party to those treaties, it may have to disregard the new Greek currency as a matter of public policy. The net effect of this analysis is that international, Euro-dominated obligations of Greek debtors which are (i) payable outside Greece and (ii) governed by a foreign system of law, are likely to remain denominated in Euro, notwithstanding Greeces withdrawal from the Eurozone and its unilateral creation of a new monetary unit. Thus, obligations contracted by the Greek government or a Greek counterparty would remain outstanding in Euro if: (a) The obligations were represented by bonds issued on the international markets and governed by English law; (b) the obligations arose under loans contracted with banks in the London market where Euro repayments are to be made outside Greece; and (c) the obligations arise under swaps/ derivative contracts contracted with a London bank and governed by English law. Although the above views are expressed by reference to English law, it is likely that the same analysis would apply to international obligations governed by New York law or, indeed, any other external system of law.
debtor sought to make payment in the new drachma when under the principles described abovepayment ought to have been made in Euro; (b) under debt documentation applicable to corporate obligors established in Greece, a material adverse change default may arise as a consequence of the currency substitution, because this will render it more difficult for the obligors to service their international borrowings; and
(c) although creditors may suffer significant losses as a result of the currency substitution, it is unlikely that private claimants would have any recourse in national courts to recover such losses from the Greek Government. Apart from other obstacles, such a claim would be barred by the doctrine of State immunity.
Conclusions
Given the issues at stake, it must be likely that the current impasse in the
negotiations between the Eurozone finance ministers will be resolved in the near future. But there is no certainty that this will be the case, and domestic instability within Greece may threaten its continued Eurozone membership. In addition, the prospect of a Greek sovereign default has massive implications for European financial institutions, the European Central Bank and many others. Markets and government officials will be anxious to see a rapid resolution of the Greek funding crisis.
This advisory is for guidance only and is not intended to be a substitute for specific legal advice. If you would like further information, please contact the Edwards Angell Palmer & Dodge LLP attorney responsible for your matters or: Charles Proctor, Partner +44 (0) 20 7556 4623 cproctor@eapdlaw.com
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