Greece, Grexit, Cross-Default – What is next?
On Monday 13 July 2015 the Eurozone Finance Ministers stated that they have entered into an understanding for further funds to be made available to Greece under the rules of ESM (combined with a more or less state controlled Greek trust fund for assets to be privatized) to avoid structuring a temporary Grexit. Such understanding is conditional upon the Greek parliament passing certain legislation on 15 July 2015.
On 30 June 2015 the availability period for Greece to make further drawings under the EFSF Master Facility expired (the second rescue package). At the same time the office of Christine Lagarde, Managing Director of the IMF, notified the Executive Board that the Greek repayment due on that date was not made. As a consequence the Board of Directors of the EFSF declared on 3 July 2015 that such missed repayment to the IMF triggered an Event of Default under the terms of the EFSF Master Facility and reserved EFSF’s rights. On 13 July 2015, the Managing Director of the IMF notified the Executive Board that another Greek repayment which was due on that day was not made. The Board of Directors of the EFSF have not (yet) accelerated repayment of the entire EFSF Facility.
In respect of these non-payments, market participants should check their relevant documentation to see whether such events establish cross-defaults under their respective instruments. In this context it needs to be noted that the Event of Default provisions under the published English law governed Master Financial Assistance Facility Agreement with Greece do not require the IMF related event and most of the other relevant events which constitute an Event of Default to be continuing. There is therefore an open question as to whether any subsequent remedial action in relation to the breach of the repayment obligations vis-à-vis IMF would mean there is no longer an Event of Default under the EFSF Master Facility.
On 5 July 2015 the Greek Referendum on the proposed conditions for further drawings under the EFSF Facility resulted in a “no” vote. The second rescue package is no longer available to Greece after 1 July 2015 and there is a legal right to accelerate all outstanding amounts. Taking this into account, in principle three solutions have been discussed in the public sphere: (i) another debt restructuring, (ii) a third rescue package, and (iii) a (temporary) exit of Greece from the Euro.
Another debt restructuring has been dismissed because the ECB is not permitted to participate in a haircut of Member State debt as Advocate General Cruz Villalon demonstrated in his opinion of 14 January 2015 in relation to the Outright Monetary Transaction (OMT) proceedings (which are not related to the crisis in Greece but which have wider implications on state financing in the Eurozone in general): “Moreover, the ECB has stated in its written observations that in the context of a restructuring subject to Collective Action Clauses it will always vote against a full or partial waiver of its claims.” That statement was not rejected but implicitly confirmed by the European Court of Justice in its OMT Judgement of 16 June 2015. Accordingly, a restructuring of the Greek debt would be difficult from a legal perspective.
Under the terms of the European Stability Mechanism (ESM) according to Article 136(3) of the Treaty on the Functioning of the European Union (TFEU), a third rescue package could only be made for Greece if it is indispensable to safeguard the stability of the Eurozone as a whole and the granting of any required financial assistance would be made subject to strict conditionality. Further, any ESM Facility would require the consent of a number of Parliaments of Member States of the Eurozone, in particular the consent of the German Parliament, the Bundestag. In this context it needs to be noted that the wording of Article 136(3) TFEU namely “to safeguard the stability of the Eurozone as a whole” is different from the wording of the ESM Treaty which is “to safeguard the stability of the Eurozone as a whole and of its Member States”. Since TFEU is the primary law of the European Union, it takes precedence over the ESM Treaty. It will therefore be hard to argue that the words “and of its Member States” can be interpreted to mean that any measures taken under the ESM either need to safeguard the Eurozone as a whole or may alternatively safeguard the Member States, because TFEU only allows measures to be taken for the purpose of safeguarding the stability of the Eurozone as a whole. We can expect this issue to be revisited by the German Federal Constitutional Court (Bundesverfassungsgericht) in future as a result of one or more German Members of Parliament arguing that the ESM acts outside of its powers by providing further funds to Greece.
In our previous post Do We Need to Fear a Grexit we asked whether it is legally possible that Greece ceases to be a member of the Eurozone without exiting the EU and whether such an exit could be done on a temporary basis. We have also written a longer article on this topic which was circulated to members of Insol Europe in its July newsletter which considers the steps that would be necessary to effect a temporary Grexit. Click here to read the Inside Story -Greece