A summary of the report “Profiting from crisis”

International arbitrage and investor privileges in Greece and Spain

13 May 2014 by Giulia Simula

What do international arbitration institutions have in common with Domino’s Pizza, public transport operators, pawnbrokers, discount supermarkets, property auctioneers, and opposition politicians? Answer: all have profited from the global economic downturn. [1]
In their report titled: “Profiting from injustice: how law firms arbitrators and financiers are fuelling an investment arbitration boom [2], CEO (Corporate European Observatory) and TNI (Transnational Institute) have already denounced how corporations take advantage of investor rights in trade and investment agreements to sue governments for million of euros of compensation

If governments take policies of environmental or social protection and these happen to interfere with the profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. of multinational corporations, these have the right to bring a government before an international tribunal to demand compensation, for expected revenue that did not materialise. In the current report, the two examples of Greece and Spain illustrate how banks and corporations are profiting from the current crisis through the lucrative practice of international arbitrage [3].

This is made possible thanks to the Investor-State Dispute Settlement (ISDS). This instrument of public international law is contained in the great majority of bilateral trade and investment agreements signed between countries since the 1990s and it grants foreign investors the right to initiate disputes against a foreign government. It also gives them the ability to bypass national courts and directly bring governments before an international arbitration panel such as the International Centre for Settlement of Investment Dispute (ICSID ICSID The International Centre for the Settlement of Investment Disputes (ICSID) is a World Bank arbitration mechanism for resolving disputes that may arise between States and foreign investors. It was established in 1965 when the Washington Convention of that year entered into force.

Contrary to some opinions defending the fact that ICSID mechanism has been widely accepted in the American hemisphere, many States in the region continue to keep their distance: Canada, Cuba, Mexico and Dominican Republic are not party to the Convention. In the case of Mexico, this attitude is rated by specialists as “wise and rebellious”. We must also recall that the following Caribbean States remain outside the ICSID jurisdiction: Antigua and Barbuda, Belize, Dominica (Commonwealth of) and Suriname. In South America, Brazil has not ratified (or even signed) the ICSID convention and the 6th most powerful world economy seems to show no special interest in doing so.

In the case of Costa Rica, access to ICSID system is extremely interesting: Costa Rica signed the ICSID Convention in September, 1981 but didn’t ratify it until 12 years later, in 1993. We read in a memorandum of GCAB (Global Committee of Argentina Bondholders) that Costa Rica`s decision resulted from direct United States pressure due to the Santa Elena expropriation case, which was decided in 2000 :
"In the 1990s, following the expropriation of property owned allegedly by an American investor, Costa Rica refused to submit the dispute to ICSID arbitration. The American investor invoked the Helms Amendment and delayed a $ 175 million loan from the Inter-American Development Bank to Costa Rica. Costa Rica consented to the ICSID proceedings, and the American investor ultimately recovered U.S. $ 16 million”.

). It is worth noting that on the other hand, countries are not entitled by any agreement to prosecute transnational corporations (TNCs) whenever they violate human rights or environmental standards.

These treaties give extensive powers to TNCs, who are now taking advantage of ISDS to exploit the crisis for their own profit by suing southern European governments for billions of dollars. The number of prosecutions has rocketed in the last 15 years and in concomitance with the economic crisis. The ISDS has been used in the past to spill money from developing countries such as Argentina, Mexico and Ecuador. Argentina is indeed the most sued country with 55 investor-state lawsuits, the majority of which followed the policies implemented during the 2001-2002 economic crisis. But the beginning of the financial meltdown in 2008 triggered speculators to start litigations against European countries as well. This practice has now become incredibly lucrative for investors and speculators as a result of the measures taken to respond to the crisis.

Companies have sued countries for policies of social or environmental protection which interfere with foreign corporate profits. Similarly, countries that are required to implement debt restructuring programmes or austerity measures in order to comply with European fiscal deficit targets, such as southern European countries that easily became the target of vultures companies. This practice is clearly visible in the case of Spain and Greece which this summary will concisely portray.

Big businesses on both sided of the Atlantic are now lobbying to include the ISDS in the Transatlantic Trade and Investment Partnership (TTIP) now being negotiated between the EU and the US. This could pose a great threat to democracy, as the freedom of economic decision-making (especially in crisis-period) will be greatly reduced if investors’ rights increase. The fear of being prosecuted can also result as a deterrent for governments wanting to implement social policies and willing to invest public funds. This threat has been recognised by both the United Nations (UN) and the International Monetary Fund IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

(IMF) that acknowledge how investor rights in trade agreements reduce states’ ability to respond with regulatory policies particularly in time of severe economic crisis. Most importantly, ISDS is a sever burden for public budget since the money used by governments to defend themselves in international tribunals is public money retracted from education, public health, or the creation of economic stimuli. In a time when austerity measures squeeze the population it is simply outrageous and immoral that millions are spent in litigations and compensations for Transnational Corporations (TNCs).

Greece and Cyprus falling into the debt trap

As known, sovereign debt Sovereign debt Government debts or debts guaranteed by the government. crisis are a gold opportunity for investment and hedge funds Hedge funds Unlisted investment funds that exist for purposes of speculation and that seek high returns, make liberal use of derivatives, especially options, and frequently make use of leverage. The main hedge funds are independent of banks, although banks frequently have their own hedge funds. Hedge funds come under the category of shadow banking. to speculate and make easy money. Developing countries (such as Argentina, Congo, Liberia and Zambia) are still paying the costs of this savage practice. But increasingly, European countries in financial troubles are becoming the target of speculators. One of the most hit countries as of now is Greece that is being prosecuted by foreign bondholders for losses resulting from the terms of debt restructuring even though these terms were not decided by the government but rather imposed from the Troika Troika Troika: IMF, European Commission and European Central Bank, which together impose austerity measures through the conditions tied to loans to countries in difficulty.

IMF : https://www.ecb.europa.eu/home/html/index.en.html

In Greece, investors’ strategy consisted into buying cheap-debt in the form of sovereign debt bonds discounted because of the economic crisis. These bonds were sold by the Greek government at an average of 50% their face values for a total of € 50 billion Greek debt being bought by speculative funds. Afterwards, these bondholders demanded to be paid the full value of this debt in order to profit from their “investment”. If the government refused to pay the full value of its sovereign debt, bondholders would try to enforce payment by seizing assets abroad and suing governments in international arbitration tribunals. Through investment agreements such as the 39 Bilateral Investment Treaties (BITs) ratified by Greece, investors are in fact protected from losses whenever they perform high-risk investments and can challenge governments in international courts. This is true even when speculators were gambling on junk-debt, a high risky investment.

While speculators were buying sovereign debt, the Troika injected money into the Greek economy under two conditions: debt restructuring and the implementation of austerity measures including a massive privatization plan - this affected pensions, education, healthcare, natural resources distribution and public companies restructuring-. Austerity packages hit the Greek population extremely hard, in particular the weakest and least protected sectors of society. But have bondholders also bore the burden of the debt restructuring? The answer is no! Bondholders, particularly big banks, got a very sweet deal while most of the sovereign debt has been socialised, hence paid by the population already squeezed by austerity policies. Even though banks and debt restructuring were directly imposed from the EU as part of the Greek bailout package, this did not stop bondholders from suing the country. Two foreign bondholders Postová Bank from Slovakia and its Cypriot shareholder, Istro Kapital brought the Greek government before an arbitration tribunal, claiming losses because of the terms of the debt restructuring. In this case as in many others, international agreements amply protected investors even in cases where national policies were imposed from outside.

To understand the reason why bondholders should be held responsible and pay the costs, it is essential to stress that investors were well aware of the risks they were undertaking when buying Greek sovereign bonds. In April 2010 rating agency Rating agency
Rating agencies
Rating agencies, or credit-rating agencies, evaluate creditworthiness. This includes the creditworthiness of corporations, nonprofit organizations and governments, as well as ‘securitized assets’ – which are assets that are bundled together and sold, to investors, as security. Rating agencies assign a letter grade to each bond, which represents an opinion as to the likelihood that the organization will be able to repay both the principal and interest as they become due. Ratings are made on a descending scale: AAA is the highest, then AA, A, BBB, BB, B, etc. A rating of BB or below is considered a ‘junk bond’ because it is likely to default. Many factors go into the assignment of ratings, including the profitability of the organization and its total indebtedness. The three largest credit rating agencies are Moody’s, Standard & Poor’s and Fitch Ratings (FT).

Moody’s : https://www.fitchratings.com/
Standard & Poor’s classified the Greek debt as “junk”. As a result many investors got rid of Greek bonds as fast as possible. Yet Postová Bank saw this as an opportunity to make profit and bought sovereign bonds despite they had just been downgraded. Despite having freely decided to make such a risky investment and notwithstanding the warnings of a potential Greek default alerted by rating agencies, Postová Bank then refused to restructure Greece’s debt and demanded compensation for the losses. The bank, together with many other banks and investors claimed that Greece had violated its obligations under the BITs and thus brought the government before ICSID the international court under the auspices of the World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.


While some economists suggested a sustainable debt-restructuring plan that evenly spread the costs among creditors, these proposals were ignored leading to the approval of the “Greek Bondholders Act” under the Troika’s advice. Thanks to this Act, the biggest foreign bondholders were highly favoured, big banks received a very good deal and as if that was not enough, almost half of the bailout money received from the Troika went into the re-financialisation of Greek banks holding the public debt. Even though Postová Bank and many other banks took a great risk when they decided to buy “junk” bonds from a country in crisis the losses that they made were very limited if confronted with the high profits they gained.

Domino effect: from Greece to Cyprus

The Greek debt was partly owned by Cypriot banks such as the Laiki Bank and the Bank of Cyprus who bought large amounts of Greek bonds, the majority of which was lost with the debt restructuring. At present, the number of cases raised on the ground of investment treaties are limited, but the fact that Greece and Cyprus have respectively 39 and 20 BITs in force open the way for new persecutions to come even after the crisis. The Laiki Bank holds deposits worth for 20 billion from Russia investors, which increases the possibility of new claims by stakeholders using BITs. The cases of Greece and Cyprus clearly demonstrate how investment treaties limit the capacity of a state to freely make decisions in time of economic crisis. Moreover, these cases bring to light how private corporate losses are socialised through compensation while the profits remain private.

Spain solar dream becomes a legal nightmare

The case of Spain elucidates how subsidies cuts not only increase discontent among the population but also raise the number of litigations by foreign investors. After the reduction of subsidies for solar energy investments, Spain had to face numerous lawsuits against big foreign companies. While Spaniards have no alternative but to pay the price of the crisis and of austerity measures, foreign corporations have the luxury of exploiting the austerity policies to their best advantage and for their own profit.

Before the economic recession, Spain heavily subsidized renewable energy investments leading to a high number of people investing in this sector and to Spain becoming a global leader in the solar energy industry. However, as other Southern European countries hit by the financial meltdown, Spain was required by the EU to reduce public spending. As a consequence, the government cut subsidies and many investors experienced severe losses as a result. These cuts were highly criticised by civil society organisations that rejected them even though they were driven from a condition of severe economic deficit. But civil society groups were not the only one who rejected the cuts; investors harshly attacked these policies and started demanding compensation for their losses by suing the Spanish government.

It is reasonable that organisations such as SomEnergia, a cooperative working on solar energy, and the environmentalists Ecologistas en Acción defended and demanded public investment in solar energy as this would serve to replace fossil fuels. What is less plausible is how foreign speculators have the right to sue the government even if they invested when the economic crisis had already begun and when cut on subsidies was foreseeable if not already in place. Whereas the civil society could only use the power of public protest to support the environmental benefits of solar energy, foreign investors could retaliate with international lawsuits against the government. These foreign companies could gain high profits because protected by international investment agreements even when undertaking high-risk investments. These agreements (be they BITs, free trade agreements with investment protection clause or energy agreements) only give protection to foreign investors and they are discriminatory for national investors that do not have recourse to international arbitration. Clearly, the people of Spain will pay the bill if foreign companies win the cases, and, on top of this, national investors will not receive any compensation. So, ironically, a Spanish investor will not receive any help to write off expenses or amortise losses and on top of this, he/she will also have to pay through his/her taxes the compensation given to foreign companies.

“As a result of the slashing of solar subsidies, 22 companies – mainly private equity Equity The capital put into an enterprise by the shareholders. Not to be confused with ’hard capital’ or ’unsecured debt’. funds that came into the market after the crisis had started – have sued Spain at international tribunals in seven different cases. All lawsuits are based on the Energy Charter
 Treaty (ECT), a multilateral agreement that provides protections to investors in the energy sector.
 The investors’ rights contained in this treaty are similar to those found in bilateral investment treaties (BITs). It also allows companies to sue governments at international arbitration tribunals.” [4]

The investors come from Western Europe including Denmark, France, Italy, Germany, Luxembourg, UK, Netherlands, Belgium, Norway and so on and in five out of seven cases, the law firm “Allen & Overy” is representing the investor. More than 50% of these companies started investing when the crisis was already spreading-out and the cut in solar subsidies was already beginning. According to these investors, the responsibility of profit losses lays in the hands of the Spanish government for cutting subsidies. Yet, by the time many of these companies invested in Spain the crisis was already deepening, the sovereign and private debt was increasing and subsidies to solar energy were starting to be reduced. Under these circumstances, to what extent can the government be held responsible for profit losses? As the adverse economic condition was clear to all, the decision to invest was driven by a clear intention to speculate from the crisis and, under these circumstances, investors should have no rights to blame the government for profit losses.

The first litigation against Spain was in November 2011 and included 15 photovoltaic investors. These 15 funds own nearly a third of the installed solar power plants of the country. After the cuts, these 15 investors got together and sued the government demanding 600 million euros. The lawsuit headed by the international law firm Allen and Overy includes firms such as the White Owl Capital AG and the KGAL GmbH & Co KG, two of Germany’s leading funds in the field of renewable energy. These two companies continued to invest in solar power plants even after the beginning of the lawsuit launched in 2011. The former has acquired 20 solar plants from 2009 to 2012 and despite the big losses experienced following the subsidies’ cuts; it continued to invest in six power plants in 2011. KGAL has also made three big investments in 2011 albeit the adverse Spanish economic environment while simultaneously preparing the lawsuit. Likewise, four other lawsuits emerged in 2013 by four different investment funds Investment fund
Investment funds
Private equity investment funds (sometimes called ’mutual funds’ seek to invest in companies according to certain criteria; of which they most often are specialized: capital-risk, capital development funds, leveraged buy-out (LBO), which reflect the different levels of the company’s maturity.
. Yet by the time they invested, cuts were already in place and further reduction in government investments were to be expected. For this reason these investments are likely to have been speculative in nature.

Parallel to cuts in government expenditures, Spain has implemented strong austerity measures in order to comply with the European fiscal deficit targets. These have hit the population really hard, unemployment is skyrocketing and the number of families below the poverty line is increasing leading to a wave of suicides. While cutting on health and education expenditure, the government is spending millions to defend itself in international tribunals and irrespective of who wins the case, the government has to cover expenditures for the law firm hired to defend itself. The costs of these law firms reach incredible sums in the middle of a financial crisis where Spain needs every euro to address the social and economic catastrophe. Citizens are already suffering from the hardship of austerity measures imposed by the Troika, and as if this was not enough, they will also bear the costs of these lawsuits. Citizens’ expectations have also been breached through promised jobs that did not materialise, a health system that is increasingly privatised, cuts to education and to public expenditure. But contrary to big foreign corporations, citizens cannot sue their governments and are obliged to fuel the enrichment of foreign companies while domestic ones are closing down.

European companies are not the only ones starting litigations against Spain. According to the magazine El Economista [5] , investment funds from the
US, Japan, and United Arab Emirates also intend to claim for their losses following energy reforms. This means that Spain could be facing even more lawsuits in the near future. Regardless of the government’s decision to cut renewable energy subsidies and whether this could have been avoided or not, we should ultimately ask ourselves whether foreign investors should have the right to claim billions in compensations for policies implemented during a strong financial crisis under the pressure of the Troika to align with European policies.


[1Global Arbitration Review Journal, November 2010

[2For full report see the CEO website: http://corporateeurope.org/trade/2012/11/profiting-injustice

[4For more info see the report “Profiting from the crisis” p.28

[51/11/2011El Economista



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