Is it legally possible that Greece ceases to be a member of the Eurozone without exiting the EU and without changing the treaties which establish the European Union and what consequences would this have for existing contracts and outstanding bonds?
We consider whether it is legally possible for Greece to cease being a member of the Eurozone and what consequences such “Grexit” would have for existing trade contracts and loans with counterparties in Greece and the government bonds issued by the Hellenic Republic.
The starting point is that the crisis of the Greek debt is still not resolved and the conditions precedent for any further disbursements under the second rescue package have not yet been met by Greece. Further, the availability of the second rescue package expires on 30 June 2015. Even if the outstanding drawings could be made under the second rescue package, they would not be sufficient to pay all outstanding debt of Greece. Taking this into account, in principle two solutions are being discussed in the public sphere in addition to a hypothetical third rescue package: (i) another debt restructuring, and (ii) an exit of Greece from the Euro.
In relation to a further debt restructuring, a major legal issue will be whether such debt restructuring would infringe Article 123 of the Treaty on the Functioning of the European Union (TFEU) which prohibits a state financing through the European Central Bank (ECB) and the National Central Banks (NCBs). In that respect it needs to be noted that Advocate General Cruz Villalon stated in his opinion of 14 January 2015 in relation to the OMT proceedings (which are not related to the crisis of Greece but which have wider implications on state financing in the Euro-Area in general): “Moreover, the ECB has stated in its written observations that, in the context of a restructuring subject to CAC [Collective Action Clauses] it will always vote against a full or partial waiver of its claims.” Accordingly, a restructuring of the Greek debt would be very difficult from the legal perspective.
In respect of Greece exiting the Euro, it is understood that such exit could only be a real solution if the currently outstanding Greek debt was no longer payable in Euro, but could be serviced and repaid in a new Greek currency (“New Currency”).
An exit of Greece from the Eurozone had already been discussed in 2011/2012 during the first Greek debt crisis. At that time, however, the main focus of the relevant market participants was on what consequences a unilateral exit of Greece would have if a Greek Act of Parliament had provided for the introduction of a new currency combined with a unilateral redenomination of debt and capital controls. The analysis for such scenario in principle was that a Greek Act of Parliament providing for a redenomination could only interfere with Greek law-governed contracts and instruments, but would in principle not directly change contracts and instruments governed by laws other than Greek law.
A redenomination of Greek debt through European Union legislation rather than domestic Greek legislation was not in the focus of market participants in 2011/2012. If the political players in the discussions with Greece should come to the conclusion that it would be in the best interest of Greece and the Euro-System that Greece leaves the Euro-System, then they might conclude that it should not be Greece which unilaterally exits from the Euro. Instead, a structured exit of Greece from the Euro could be done on European Union level by giving a wide interpretation to those rules of the TFEU which originally provided for the accession of Greece and proposing that TFEU allows a reversion of the accession of Greece by way of “actus contrarius” through the Council of the European Union adopting a decision and a Council Regulation which states (i) that Greece ceases to be a member of the Euro, (ii) Greece is allowed to introduce a new own parallel currency and (iii) all outstanding debt of Greek debtors is redenominated after a certain time from Euro into the New Currency at the then prevailing market rate.
Such a Council Regulation would be European Union law and would as such have priority over the domestic laws of the Member States of the European Union and in addition to such superiority in the hierarchy of rules it would be, if done in the form of a Regulation, directly applicable in all Member States of the EU.
If an exit of Greece from the Eurozone and a redenomination of Euro denominated debt into New Currency denominated debt would be effected by EU legislation, then the currency to be paid under trade contracts, loans, bonds, derivatives, and other instruments governed by a law of another Member State of the EU (for example governed by German, French, Italian, Spanish or English law) could be changed from Euro into New Currency because such EU legislation would be binding in all Member States of the EU and would need to be recognised and applied by all courts of the Member States.
But for now, all we can do is watch and wait to see how the negotiations in Brussels unfold this week.