Greek bonds, trade pacts and who gets to be the law

By Tim Worstall , written on April 10, 2014

From The News Desk

It's a standard part of trade pacts these days that under them investors are able to take legal conflicts with governments to independent arbitration rather than have them run through the court system in the country where they're having an argument with the government. This causes great outrage among certain types: what, you mean that the capitalists will be able to dodge government?

And yes, that is exactly what is being said here, that the capitalists should be able to dodge a government changing its mind. Or as the reality is, a company or investor ought to be able to hold a government to whatever promises that government made before the company or investor started to splash the cash. It's all about this rule of law thing.

For example, if a trade treaty says that, just as an example, a Spanish oil company is allowed to invest in the Argentine oil industry then OK, this is allowed to happen. And if the Argentine Government then decides that they're not going to allow any of those filthy foreigners to control that national patrimony (no, the Argentines are not just like the Spanish, the old phrase is that they're a bunch of Italians who speak Spanish and think they're English... there really is a Harrods in Buenos Aires) and decides to nationalise that multi-billion dollar investment then that's also fine. No, really, this is entirely allowable under international law and domestic. It's just that how much the Spanish should get paid for their investment shouldn't be decided by the court system that the Argentine Government that might be thought to have a little control over. Which is why Repsol is in arbitration over how much it will get, not the Argentine court system.

This actually seems fair enough actually, in that particular country at least, given the way that the country has been known to threaten jail economists who try to calculate the inflation rate and arrive at a conclusion at variance with that of the official statistics agency. The reason for this little contretemps being that that Argentina has a series of bonds in issue that pay inflation related interest....

While this sort of guarding against the vagaries of Peronist governments might seem fair enough the cry goes, why the hell are they being written into a US/EU trade deal for example. Are we really saying that the court systems of either country can't be trusted?

Yes, that is in fact what is being said: perhaps not entirely the court systems but the political class as a whole isn't to be trusted anywhere. And if you don't share my cynicism on that point a small example from the latest bond issue by the Greek Government:

Law/Listing: English Law / Athens Stock Exchange regulated market
Greece is issuing bonds under English law for the same reason that Argentina has issued bonds under New York law. Because people don't trust them if they were to issue them under Greek and Argentine law respectively. And the Greek story is still rather fresh in investors minds.

Back a couple of years we all know that investors in Greek bonds received a haircut: the jargon for being told there was no money left and so they wouldn't be getting theirs back. Investors lost 70% immediately: if you thought you had €100 of bonds you now had €30. And that's all entirely legal too. Except for one thing. The majority of those Greek bonds were issued under Greek law. And the government changed that law (technically, changed the collective action clauses) to make it easier to impose that haircut. Instead of 90% of all bondholders having to agree to it they made it 75%. And this was after everyone knew that there was going to have to be a haircut. So, post-facto changes in the law done by a government that owed too much money to too many people.

Except, except, some of the bonds had been issued under English law. And the Greek Government doesn't have the power to change English law retrospectively in quite the same way that it can change Greek law. Those English law bonds got paid out in full, didn't receive a penny or a percentage point in a haircut.

Which is why, now that Greece is coming back to the private bond market it's issuing its bonds under English law. Because they will pay a lower price for doing so given people's fears of their changing the rules again if they issued under Greek law. All of which brings us right back to why there's private arbitration written into trade pacts these days. Simply because a few centuries of experience has shown us that governments aren't the most trustworthy of beings and if a private actor gets into an argument with one it's probably a good idea to make sure that the courts that decide the case aren't controlled by the government being argued with.

Or, as the protestors claim, this is a negation of democracy. Yup, it is, that's the whole point of it. To make sure that the will of the mob, that demos, doesn't over ride the rule of law.

[image via wikipedia]