“Exceptional circumstances can help indebted States”

14 January 2021 by Eric Toussaint

A judgment by the Court of Justice of the European Union states that a State is entitled to impose losses on its creditors. This is a most significant decision.

Several States facing a radical change of circumstances because of the impact of the pandemic and the international economic crisis should call upon the rebus sic stantibus principle to substantially reduce the fiscal resources currently dedicated to paying their creditors and use them for expenses intended to help their populations. For many years now the Committee for the Cancellation of Illegitimate Debts (CADTM) has claimed that International Law entitles governments to impose losses on their creditors as they take unilateral measures to help their populations.

A recent judgment by the Court of Justice of the European Union (CJEU) confirms that a State can unilaterally change its obligations in terms of debt. In a judgment dated 23 May 2019, European judges ruled against the applicants, German creditors (three individuals and two companies) of Greek debt, who had demanded financial indemnities for a total amount of almost € 4 million. Those German creditors considered that the law voted in Greece in 2012, which enforced the exchange of its debt securities for new securities with a haircut of over 50%, represented a violation of Greece’s obligations. The applicants called upon the violation of the pacta sunt servanda principle, which means that the terms of a contract have to be adhered to.

The Court replied that this general principle did not apply to them and that in any case the principle pacta sunt servanda could be waived if the State called upon the principle rebus sic stantibus. The Court dismissed the case and ordered them to pay court costs.

 Circumstances that can modulate any contract

The law principle known as pacta sunt servanda, according to which a State must adhere to the obligations it has contracted, is not absolute. In some circumstances a State is entitled not to carry out the terms of the contract. Moreover it can change them. Indeed the principle pacta sunt servanda principle, which implies that the parties are bound to the signed contract and for this reason they may not derogate from the obligations arising from this agreement, is qualified by another principle called clausula rebus sic stantibus (all things being equal), which means that the provisions of the treaty or contract remain applicable only insofar as the circumstances which led to the conclusion of these acts remain as they are or that any change does not radically alter the obligations initially agreed. Put very simply, if the circumstances in which a contract has been signed change significantly, one of the parties may refrain from executing the terms of the contract.

The Court informed the creditors that they were not entitled to call upon the principle of the Greek State’s continued obligations to them. Firstly, it stated that the Vienna Convention on which the applicants based their demand only applies to relations between States. Here is what the judgment says in Item 78: “In the present case, the applicants’ subscription to the disputed debt securities issued and guaranteed by the Hellenic Republic created a contractual relationship between them and the Hellenic Republic. That contractual relationship is not governed by the principle pacta sunt servanda of Article 26 of the Vienna Convention on the Law of Treaties. Pursuant to its Article 1, this Convention applies only to treaties between States.”

Secondly, the judges asserted that Greece could invoke the argument that circumstances had changed, i.e. the principle rebus sic stantibus, to withdraw from the obligations relating to a contract. Greece used the principle rebus sic stantibus to vote Law n° 4050/2012 which imposed a loss of about 50% to holders of Greek debt securities.

Here is what the Court of Justice of the European Union (CJEU) says in Item 84: “Moreover, and in any event, there is no evidence that the adoption of Law No. 4050/2012 led to a violation of the principle pacta sunt servanda. Indeed, investment in government debt Government debt The total outstanding debt of the State, local authorities, publicly owned companies and organs of social security. securities was not exempt from the risk of pecuniary loss, even if the law governing such securities did not provide for the possibility, prior to maturity, of renegotiating certain terms, such as nominal value, accrued coupon and maturity. As indicated by the Greek Council of State, this risk is due in particular to the long period of time that elapses from the issue of the debt securities, during which unforeseen events could substantially limit or even destroy the financial capacities of the State, issuer or guarantor of these securities. As held by the European Court of Human Rights (hereafter the “ECtHR”), if such contingencies arise, as in the present case the Greek public debt crisis, the issuing State is entitled to attempt renegotiation on the basis of the principle rebus sic stantibus.” [1]

 A most significant decision

This is a significant decision on two grounds: 1. Private creditors, whether individuals or private companies such as banks, 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.
or vulture funds Vulture funds
Vulture fund
Investment funds who buy, on the secondary markets and at a significant discount, bonds once emitted by countries that are having repayment difficulties, from investors who prefer to cut their losses and take what price they can get in order to unload the risk from their books. The Vulture Funds then pursue the issuing country for the full amount of the debt they have purchased, not hesitating to seek decisions before, usually, British or US courts where the law is favourable to creditors.
, cannot call upon the Vienna Convention to turn against States that cause them losses. 2. A State is entitled not to carry out the terms of a contract with creditors and to change the contract and enforce losses on creditors. This means that they can cancel debt or substantially reduce it given certain circumstances.

Translated by Vicki Briault and Christine Pagnoulle

Source : Le Soir


[1The complete text of the 30 page judgment is available in several languages, though not yet in English, on the Court of Justice of the European Union website http://curia.europa.eu/juris/document/document.jsf;jsessionid=3EC2BC9C2F62009CF7333113BCBB68E4?text=&docid=214384&pageIndex=0&doclang=FR&mode=req&dir=&occ=first&part=1&cid=21930352

Eric Toussaint

is a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège, is the spokesperson of the CADTM International, and sits on the Scientific Council of ATTAC France.
He is the author of Greece 2015: there was an alternative. London: Resistance Books / IIRE / CADTM, 2020 , Debt System (Haymarket books, Chicago, 2019), Bankocracy (2015); The Life and Crimes of an Exemplary Man (2014); Glance in the Rear View Mirror. Neoliberal Ideology From its Origins to the Present, Haymarket books, Chicago, 2012, etc.
See his bibliography: https://en.wikipedia.org/wiki/%C3%89ric_Toussaint
He co-authored World debt figures 2015 with Pierre Gottiniaux, Daniel Munevar and Antonio Sanabria (2015); and with Damien Millet Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. He was the scientific coordinator of the Greek Truth Commission on Public Debt from April 2015 to November 2015.

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