- Failure to reach an agreement on the Greek bailout over the weekend and Syriza’s call for a referendum has led the ECB to cap Emergency Liquidity Assistance (ELA) to the Greek banks and has accelerated a range of material financial developments, including the closure today of the Athens Stock Exchange (ATHEX), the closure of Greek banks for up to 7 days and the imposition of capital controls.
- Without new money from the ELA, the options to keep the banking system working may be limited to nationalisation and/or a general restructuring of Greek banks’ obligations.
- The situation remains fluid and fast-moving, but suggests we have definitively entered a sustained and challenging period for the Greek economy and for counterparties in Greece-related transactions. Navigating these challenges over the coming days and weeks will require caution and a detailed understanding of applicable law and regulation.
- Immediate practical points to consider include the problems of exposure to payments to or from Greek banks, unsettled trades/“trapped assets” on ATHEX, Event of Default and Material Adverse Change provisions; anticipated “Business Days” no longer being “Business Days” due to unscheduled bank closures and the impact on payment obligations, accrual periods and counterparty risk more generally.
In advising our clients in these matters, we are drawing on our unparalleled experience advising in bank bail-out and similar circumstances globally and on very strong working relationships with leading Greek law firms on the ground.
The developments and potential risks and challenges summarised here are complex and evolving rapidly. For more detailed guidance please speak to your Freshfields’ relationship contact.
- Where are we now? Last weekend’s talks on a potential final €7.2bn tranche of the bail-out programme have failed. Syriza, Alexis Tsipras’ left-wing party voted into power in Greece on an anti-austerity agenda in January and the Eurogroup of the EC, the ECB and the IMF have been unable to agree the conditions attaching to the tranche. Last Friday Syriza announced that it would be holding a referendum on Greece’s continued participation in the EU, this Sunday July 5.
- What are the consequences of this weekend’s failure to agree on the bailout? Greece is now likely to default on its sovereign debt – €1.6bn is owed to the IMF on 30 June. It is not clear that failure to pay the IMF will immediately trigger cross-defaults under the terms of Greece’s outstanding sovereign bonds.
- Capital controls will be imposed, but no details are available at this time. Cash withdrawals from ATMs of Greek banks have been limited to €60 per person per day. Card payments will still be authorised.
- Following a default, the ECB will refuse to accept Greek sovereign obligations as collateral for the Emergency Liquidity Assistance (ELA) facility which, until now, has been regularly increased to allow Greek banks to fund withdrawals by depositors (now held at €89bn).
- Today Monday 29 June both Greek banks and the Athens Stock Exchange have been closed by the Greek government. The closure of the Greek banks is expected to last a week. The government cannot allow the banks to stay closed indefinitely and, without new money from the ECB, must contemplate more radical policy options such as nationalisation and mandatory restructuring and/or resolution of the banking sector.
- Does this worsen or accelerate underlying solvency issues? The level of its sovereign indebtedness (€323bn around 175% of its GDP) rules out financing itself in the market. The majority of sovereign debt is from public lenders: European governments’ bilateral loans to Greece and contributions to the European Financial Stability Facility make up about 60% of the debt. A further, more comprehensive, relief programme, alongside very significant levels of structural and socio-economic reform to which Syriza is currently opposed, appear the only next steps at this point, if Grexit is to be avoided.
- Does this bring Grexit closer? Syriza’s call for a referendum on 5 July has dismayed European partners and raises the spectre of Greece unilaterally deciding to abandon the euro and reintroducing the Drachma (the so-called "Grexit"). However, Greeks have been overwhelmingly consistent in voicing support for continuing within the European Monetary Union (EMU). The introduction of a new currency in Greece could not, in any case, happen immediately and such a move would do little to relieve Greece of the burden of its current debts. Greece’s English law governed bonds would continue to be denominated in Euros and without agreement on debt reduction any new currency would suffer from hyperinflation and instability against other currencies.
- What are the kinds of key risks for clients to consider?
Contractual default. As well as redenomination (see below), counterparties exposed to Grexit are likely to default on their contractual obligations.
Termination Rights. Key clauses, such as MACs, Illegality, Force Majeure, frustration and other termination provisions will need to be considered as, following Grexit, contractual commitments may become avoidable.
Redenomination. Following Grexit, liabilities denominated in euros in Greek law governed contracts will automatically be redenominated into the new currency. The position is more complex for contracts governed by the laws of other states, but with some nexus to Greece (e.g. where contractual obligations are to be performed in Greece) but, in some cases, euro amounts may be redenominated and Greek law may be applied to certain obligations.
Capital controls. Although capital controls are normally prohibited under international treaties, they are likely to be imposed if the ECB’s ELA support to banks is stopped. This in turn will likely impact the movement of labour and services: if foreign companies cannot remit profits and dividends, they will be discouraged from setting up, and be encouraged to abandon, operations in Greece.
Expropriation. If Greece exits the EMU, the risk of nationalisations may increase. From an institutional perspective, such measures are generally prohibited by European treaties and Bilateral Investment Treaties. From a practical perspective however, if Greece defaults on its debt and sheds the influence of international lenders, it will be easier for the government to proceed with nationalisations and other expropriations, even if these contravene European, international and possibly domestic rules.