Using the local law advantage in today’s Eurozone

Abstract

Three key legacies of the Greek sovereign debt restructuring were (a) the use of the “local law advantage” to retrofit single-limb collective action clauses (CACs) in the Greek law governed bonds, (b) the strategy of the private foreign law governed bondholders to use the per-series CACs to hold out from the restructuring and (c) the exemption of the official sector bondholders from the restructuring. 

The introduction of the double-limbed Eurozone CACs coupled with the ECB’s declaration (in the context of the Gauweiler litigation) that it will vote against any restructuring of Eurozone sovereign bonds, have shown the persistence of the latter two legacies of the Greek restructuring. They have also raised the possibility that a Eurozone country, named Arcadia in this paper, which loses market access today and in need of restructuring its debt could only do so through the use of the first legacy, the “local law advantage”. 

The paper assumes that the use of the “local law advantage” is an option open to Arcadia alongside the use of the official Eurozone CACs and considers other possible challenges to the “local law advantage” and in particular challenges based on the European Convention of Human Rights by reference to the Mamatas judgment. In doing so it continues a discussion started by Buchheit and Gulati (Use of the Local Law Advantage in the Restructuring of European Sovereign Bonds) and Weidemaier (Restructuring Italian (or Other Euro Area) Debt: Do Euro CACs Constrain or Expand the Options?) and proposes that the Mamatas principles can provide guidance for the use of the “local law advantage” both in the context of the Eurozone crisis, but also more broadly in the discussion on the limits of the exercise of sovereign discretion.