EU Court Backs Bond Haircut That Staved Off Greek Default

(CN) – Tossing a suit over investment losses tied to the restructuring of Greek public debt, the European General Court ruled Thursday that the stability of the Euro-zone banking system is a legitimate public interest.

Led by Frank Steinhoff, a group of private investors brought the underlying action after Greece eyed the bonds issued or guaranteed by the Greek state as a means of resolving the public-debt crisis that had gripped the country since October 2009.

With the support of 85.8% of bond creditors, Greece secured its second bailout in 2012 by exchanging old bonds for new ones worth 53.5% less in face value and easier repayment terms for Greece.

Greece would have risked defaulting on its debt if the exchange failed, but Steinhoff and other creditors who did not consent to the swap claimed that the European Central Bank owed them compensation.

Rejecting their suit Thursday, the European General Court noted that state bond investment “always carries the risk of financial loss because of the great length of time which elapses after the issue of the bonds during which unforeseen circumstances may arise which significantly restrict, or even completely remove, the state’s financial capacities as issuer or guarantor of those bonds.”

“If such unforeseen circumstances should arise, the issuing state is entitled to attempt to renegotiate those obligations on the basis of the fundamental change in the essential circumstances which justified the conclusion of the contract which forms part of those obligations,” the court added.

The ruling says Steinhoff is correct in saying that Greece infringed his right to property by extending the consent of some investors to justify the swap of all bonds. “However, such an extension is in line with the public interest objective of ensuring the stability of the Euro-zone banking system as a whole and is not a disproportionate and intolerable infringement of that right,” the court found.

A copy of the ruling out of Luxembourg is not available in English.

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