By: difra007 on Mercoledì 16 Gennaio 2013 16:10
Giovanni, forse questo è il pezzo cui fai riferimento sulla ridenominazione del debito dal punto di vista legale.
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The legal aspects and abstractions of a euro redenomination
Joseph Cotterill
| Nov 21 2011 12:36 | 26 comments | Share
And so it came to pass, that everyone who worried about whether the euros which people owed them would stay euros for much longer…
…realised that this was not a drill.
Case in point — a note by Nomura analysts published over the weekend, which has ruffled a few feathers.
It’s one of the first investment cases drawing on the legal details of redenomination of euros into another currency. Nomura also treat this as quite an urgent practical matter:
Redenomination risk: Which Euros will stay Euros?…
Since the risk of some form of break-up is now material, investors should be thinking about “redenomination risk”: Which Euro denominated assets (and liabilities) will stay in Euro, and which will potentially be redenominated into new local currencies in a break-up scenario?
Very simply: if one, or more, or all eurozone member states change currency out of the euro, what happens to financial contracts which perform in euros (i.e. pay euros or reference rates like Euribor that are linked to the euro)? The obvious example is sovereign debt but actually the big wall of money here is private debt, derivatives, etc.
While Nomura are thinking about what assets to hold in these scenarios, we really liked their note because they grappled with the often very difficult legal concept of jurisdiction (the governing law of your contract) as a way to understand the problem. So, here is their conclusion:
Investors should consider three main parameters when evaluating “redenomination risk”. The first parameter is the legal jurisdiction under which a given obligation belongs. The second is the likelihood that a break-up can happen in a multilaterally agreed fashion. The third parameter is the type of Eurozone break-up which is being considered, including whether the Euro would cease to exist in a given break-up scenario.
In a scenario of a limited Eurozone break-up, where the Euro remains in existence for core Eurozone countries, the risk of redenomination is likely to be substantially higher for local law obligations in peripheral countries than for foreign law obligations. From this perspective, local law obligations should trade at a discount to similar foreign law obligations.
In a scenario of a full-blown Eurozone break-up, evaluating the redenomination risk is more complex, as even foreign law obligations would have to be redenominated in some form. In this case, redenomination could happen either into new national currencies (using the Lex Monetae principle), or into a new European Currency Unit (ECU-2). This additional complexity in the full-blown break-up scenario leaves it harder to judge the appropriate relative risk premia on local versus foreign law instruments.
“Lex Monetae” mentioned in the above being the the principle that a sovereign determines what its legal currency is, whether that’s euro, lira, drachma, or whatever else. More on this below.
Here’s a chart via Nomura, summarising the above:
You might recognise this “preference” for English (or NY) law assets over local ones from past debates about how investors could insulate themselves from restructuring of sovereign debt. There’s a passing resemblance of the risk of sovereigns passing new local laws to alter the terms of their debt (which English law would protect against) to the lex monetae issue. The ways in which English-law bonds differ from local ones were also brought out in the great Finnish collateral crisis of Greece’s bailout. This threatened negative pledge clauses in the bonds.
At a very basic level, if you want to carry on being paid in euros: if governed under English or New York law your assets be, you (may) get home free. If under legislation Italian or Greek, you are up the creek. If Italy or Greece left the euro, they would pass a monetary law establishing the new lira or drachma as legal tender within their territory. Local-law contracts would be more likely to obey the ‘lex monetae’ created by this legislation.
First problem here: there aren’t that many foreign-law eurozone sovereign bonds to go round, if you’re planning to pile into them. Relatively speaking anyway. Foreign-law bonds are a small part of Italian debt, but Nomura estimates that they still come to €198bn. Generally though, you probably aren’t going to buy up foreign-law bonds as sell local-law ones. Furthermore, this issue goes beyond sovereign debt — representative chart from Nomura, which sorts financial transactions across all asset classes into local and foreign law:
(Click to enlarge.) Complicated, isn’t it?
Going back to the lex monetae principle, there is a significant amount of case law behind it. “Serbian Loans” and “Brazilian Loans” are interesting interwar cases (relating to when France fell off the gold standard) which still matter today.
Unfortunately, it is not actually as simple as that when you come to think about how courts would actually apply jurisdiction in practice, to contracts with very specific terms.
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The wonders of jurisdiction
Best to contemplate this using an example.
Let’s say the Greek parliament passes legislation — call it the Drachma Conversion Law, whatever — on 31 March 2012, ruling that the New Drachma will become Greece’s sole domestic currency from midnight, 1 April 2012. (It’s a weekend! Much easier to go round the ATMs with technicians, train border guards to spot suitcases stuffed with cash, and so on.) Euro-denominated obligations in Greece will be converted to New Drachma at so-and-so a statutory conversion rate, the legislation further provides.
The law and the statutory conversion rate are what lex monetae is in practice. However, Greece has passed its law, covering Greece, but no further. Herein lies the rub. In the case of a contract with a Greek counterparty that designates English law, will the courts in the UK acknowledge the principle of lex monetae as it pertains to Greece, as sovereign, or as it pertains to the remaining eurozone states that set up the currency (and that may still retain it among remaining members)? If the latter, then the contract should remain denominated in euro.
The note by Nomura also draws our attention to the substantial difference between an unlawful, unilateral withdrawal from the euro and a consensual, lawful exit. In the case of the former, the UK courts are unlikely to recognise the redenomination anyway as such an exit is contrary to being part of the EU.
What side a court in the UK ultimately lands on is also likely to hinge on what the intent of the parties to the contract was. Did they mean to follow the lex monetae principle of the eurozone members or of the individual sovereign? This is a point put rather elegantly in an article by Charles Proctor, over a year ago:
It hardly needs to be stated that parties contracting in euro will not have given any thought to this issue which, to say the least, exists at a certain level of abstraction. The intention of the parties will therefore have to be inferred from the terms of the contract and the surrounding circumstances, and will inevitably depend on the weight of factors connecting the contract with Greece. This formulation may well be legally accurate but it is of rather limited practical value.
We can see how proving intent may indeed be rather hard if the thing you are meant to have had intentions about never even occurred to you.
And even if a case is won in the English courts, declaring that a euro-denominated Greek bond cannot be converted to drachma, that could just be the beginning of a long legal journey. Attempting to enforce the judgement and pursue a claim will itself come with a host of challenges.
Related links:
Quit euro – then instantly rejoin at weaker rate - FT
Disorderly default, almost as bad as civil war – FT Alphaville
Nomura “Goes There” With “The Legal Aspects Of A Eurozone Breakup” – Zero Hedge
This entry was posted by Joseph Cotterill on Monday November 21st, 2011 12:36. Tagged with break up, Capital Markets, Drachma, Euro, Eurozone, governent bonds, Sovereign Debt Crisis.
