Greece
On July 16, 2015, the finance ministers of the 19 eurozone
countries agreed to "grant in principle" a third bailout
package for Greece that could total €86 billion ($94.5
billion). Those ministers were joined by their counterparts from
the remainder of the 28-nation European Union (the "EU")
in agreeing to give Greece short-term loans of as much as €7
billion to meet its immediate needs. In addition, the European
Central Bank (the "ECB") expanded an emergency line of
credit for Greece's banks by €900 million, to total nearly
€90 billion. Greek banks, which had been closed on June 29,
finally reopened on July 20.
As of the end of July, it was far from clear that Greece would
actually receive its third bailout package in five years and remain
a member of the eurozone. The answer to those questions depends in
part on whether the Greek government can get Greeks to stomach yet
another round of wildly unpopular austerity measures and tax
increases.
How did Greece find itself on the brink of a sovereign debt
default?
Greece joined the EU in 1981 and became part of the eurozone
currency union in 2001. Prior to the introduction of the euro,
currency devaluation helped to finance the Greek government's
borrowing. After Greece adopted the euro, devaluation was no longer
an option. Still, during the next eight years, Greece was able to
continue its high level of borrowing because of low interest rates
borne by euro-denominated government bonds.
The Greek debt crisis started in late 2009. Among its catalysts
were the turmoil of the global recession, structural weaknesses in
the Greek economy, and a sudden crisis in confidence among lenders.
Late in 2009, revelations that the Greek government had misreported
data on debt levels and deficits triggered both anger that Greece
had misrepresented its way into the eurozone and widespread
apprehension that Greece was incapable of meeting its debt
obligations.
In February 2010, the new government of George Papandreou (elected
in October 2009) acknowledged that past governments had misreported
statistics. The government then revised Greece's 2009 deficit
from a previously estimated 6 to 8 percent of GDP to an alarming
12.7 percent. The deficit was later revised upward yet again to
15.7 percent, the highest for any EU nation in 2009. Estimated
government debt at the end of 2009 was also increased, from
€269.3 billion (113 percent of GDP) to €299.7 billion
(130 percent of GDP).
Despite the crisis, Greece's €13 billion bond auctions in
2010 were oversubscribed. High yields on the debt worsened the
Greek deficit, however, leading rating agencies to downgrade
Greece's credit rating to junk status in late April 2010.
On May 2, 2010, the European Commission, the ECB, and the
International Monetary Fund (the "IMF") (collectively
referred to as the "Troika") launched a €110 billion
bailout loan to rescue Greece from sovereign default and to cover
the nation's financial needs for the next three years. However,
the bailout was conditioned upon the implementation of austerity
measures, structural reforms, and privatization of government
assets.
Greece needed a second bailout in 2011. This package (including a
bank recapitalization package worth €48 billion) brought the
total Greek bailout outstanding to €240 billion. A worsening
recession and delays in implementing the conditions of the bailout
program spurred the Troika to approve another round of debt relief
measures in December 2012.
An improved outlook for the Greek economy during 2013 and 2014
(with a government surplus in both years, a decline in the
unemployment rate, positive economic growth, and a brief return to
the private lending market) abruptly ended in the fourth quarter of
2014, when the country once again slipped into recession.
At the end of 2014, adding fuel to the fire, the Greek parliament
called a premature parliamentary election for January 2015. Syriza,
the party that emerged victorious, had campaigned on a promise to
disavow Greece's current bailout agreement, including continued
austerity measures. Due to rising political uncertainty, the Troika
suspended the remaining aid to Greece scheduled under the existing
bailout program until the newly elected government, led by Prime
Minister Alexis Tsipras, either ratified the previously negotiated
terms of the bailout or reached a new agreement with different
terms. A Greek liquidity crisis ensued, resulting in plummeting
stock prices at the Athens Stock Exchange, while a spike in
interest rates effectively excluded Greece once again from the
private lending market as an alternative funding source.
After the election, the Troika granted an additional four-month
extension of its bailout program pending the completion of
negotiations. Confronted with the threat of a sovereign default,
the Tsipras government continued to negotiate throughout most of
June 2015 but formally broke off negotiations with the Troika on
June 26. The following day, Prime Minister Tsipras announced that,
in lieu of continued negotiations, a referendum would be held on
July 5, 2015, to either approve or reject the terms negotiated thus
far.
On July 5, 2015, Greek voters overwhelmingly (61 percent to 39
percent) rejected the proposed terms of the bailout agreement. The
result sent world markets into turmoil as the prospect of
Greece's exit—"Grexit"—from the 19-nation
eurozone loomed ever larger.
On July 8, 2015, Greece formally requested a three-year loan from
the eurozone's bailout fund, seeking a "light at the end
of the tunnel" as time expires for the country to reach a deal
with the Troika. Newly appointed Greek Finance Minister Euclid
Tsakalotos submitted the request in advance of a proposal due July
9, pledging that Greece would implement tax- and pension-related
reforms in exchange for the much-needed relief.
On July 16, in connection with the bailout package agreed to
"in principle" by eurozone finance ministers,
Greece's parliament approved painful new austerity
measures—ironically, with the support of Prime Minister
Tsipras, who announced that the measures were necessary to reach a
deal which would avert a humanitarian and fiscal disaster.
On July 20, Greece made a critical €4.2 billion bond payment
to the ECB and repaid the IMF €2 billion in loan arrears. The
money for those payments came from a €7 billion bridge loan
that the EU approved on July 17.
As of the end of July, the Greek sovereign debt crisis remained
very much in flux.
Argentina
The long-running dispute over the payment of Argentina's
sovereign debt, on which the South American nation defaulted for
the second time in July 2014, continues.
On May 11, 2015, holdout bondholders from Argentina's 2005 and
2010 debt restructurings filed a motion with the U.S. District
Court for the Southern District of New York to amend their
complaint against Argentina to include $5.3 billion in BONAR 2024
bonds issued by the republic in April 2015. The amendment would
bring this latest bond offering into the ongoing battle before
district judge Thomas Griesa that concerned the validity of the
pari passu, or "equal treatment," clause which,
according to a 2012 ruling by Judge Griesa, prevents Argentina from
making payments on restructured bonds without making corresponding
payments to holdout bondholders. Argentina's Minister of
Economy, Axel Kicillof, later responded to the action taken by
holdout bondholders, asserting that the BONAR 2024 bonds constitute
domestic debt denominated in foreign currency and thus do not fall
within the jurisdiction of Judge Griesa. Kicillof also accused the
holdouts of seeking to generate "uncertainty in the market to
harm the Republic and the bondholders" or creditors with
exposure to exchanged debt.
On May 18, 2015, one of Argentina's federal administrative
courts enjoined the Argentine branch of Citibank, N.A.
("Citibank") to "refrain from any act" intended
to fulfill a March 20, 2015, court-approved agreement between the
New York-based bank and holdout bondholders whereby Citibank's
Argentine branch was authorized to make interest payments on
Argentine-law bonds and to exit its custody business in Argentina.
According to the Argentine court, Citibank failed to satisfy the
requirements of Argentina's Código Procesal for
validating the agreement approved by Judge Griesa.
On June 5, 2015, Judge Griesa granted partial summary judgment to a
group of 526 "me too" plaintiffs in 36 separate lawsuits.
Consistent with his previous ruling in litigation commenced by a
group of holdout bondholders led by NML Capital Ltd., Judge Griesa
ruled that Argentina violated the equal treatment clause in bonds
issued to the "me too" bondholders under a Fiscal Agency
Agreement beginning in 1994 by refusing to make payments on their
bonds at the same time it paid holders of debt restructured in 2005
and 2010. See Guibelalde v. The Republic of
Argentina, 2015 BL 179208 (S.D.N.Y. June 5, 2015). The
decision obligates Argentina to pay the plaintiffs $5.4 billion
before it can make payments on restructured debt.
Puerto Rico
Although Puerto Rico is an unincorporated territory of the
United States rather than a sovereign, the financial troubles of
the beleaguered Caribbean commonwealth, which has more than $72
billion in debt, have received a great deal of attention
lately.
Due to its status as an unincorporated territory of the U.S.,
Puerto Rico is barred from seeking either protection under the
Bankruptcy Code or international financial assistance. In an effort
to remedy this problem in part, Puerto Rican governor Alejandro
García Padilla gave his imprimatur to Puerto Rican
legislation on June 28, 2014, that created a judicial debt relief
process modeled on chapters 9 and 11 of the U.S. Bankruptcy Code
for certain public corporations, including the Puerto Rico Electric
Power Authority ("PREPA"), which has $9 billion in bond
debt. The Puerto Rico Public Corporations Debt Enforcement and
Recovery Act (the "Recovery Act") was intended to
ring-fence Puerto Rico from potential liabilities arising from
defaults by its public corporations and to give the corporations a
framework for restructuring their obligations.
The new law's obvious similarities to chapter 9 and chapter 11
of the Bankruptcy Code, as well as the fact that the legislation
was not enacted in accordance with Article I, Section 8 of the U.S.
Constitution, immediately provoked attacks on its
constitutionality. Bond funds affiliated with Franklin Resources
Inc. and Oppenheimer Rochester Funds, which collectively hold
approximately $1.7 billion in Puerto Rican debt, filed a lawsuit
alleging that the legislation is unconstitutional, even though no
debtor has actually attempted to restructure its debt under the
law.
The Recovery Act was dealt a severe blow on February 6, 2015, when
a federal district court judge struck down the law as
unconstitutional. In BlueMountain Capital Management, LLC v.
García-Padilla, No. 14-01569 (D.P.R. Feb. 6, 2015), the
court ruled, among other things, that "[b]ecause the Recovery
Act is preempted by the federal Bankruptcy Code, it is void
pursuant to the Supremacy Clause of the United States
Constitution." The ruling, which was appealed by Puerto Rico
to the U.S. Court of Appeals for the First Circuit, was a setback
not only for PREPA and other public corporations attempting to
restructure their bond debt (e.g., the Puerto Rico
Aqueduct and Sewer Authority and the Puerto Rico Highways and
Transportation Authority), but also for Puerto Rico itself.
On February 11, 2015, Resident Commissioner Pedro Pierluisi, the
Commonwealth of Puerto Rico's representative in Congress,
reintroduced a bill, the Puerto Rico Chapter 9 Uniformity Act of
2015 (H.R. 870), to allow Puerto Rico's public agencies to be
debtors under chapter 9. The bill is nearly identical to one
Pierluisi introduced in 2014. The House Judiciary Subcommittee on
Regulatory Reform, Commercial and Antitrust Law held a hearing on
H.R. 870 but has taken no action since then on the bill. U.S.
Senators Chuck Schumer of New York and Richard Blumenthal of
Connecticut introduced companion legislation in the U.S. Senate on
July 15, 2015.
On June 28, 2015, Governor Padilla announced that the island cannot
pay back its $72 billion in debt, which he characterized as a
"death spiral." The announcement set the stage for an
unprecedented financial crisis that could shake the municipal bond
market and lead to higher borrowing costs for governments across
the U.S. However, Puerto Rico avoided defaulting on July 1, 2015,
when it paid back $645 million of general obligation bonds as well
as a short-term bank loan of about $245 million. In addition, PREPA
made a $415 million bond payment.
More bad news for Puerto Rico came on July 6, 2015, when the First
Circuit affirmed the district court's ruling that the Recovery
Act is unconstitutional. In Franklin California Tax-Free Trust
v. Commonwealth of Puerto Rico, 2015 BL 215414 (1st Cir. July
6, 2015), the court of appeals ruled that the district court had
not erred in striking down Puerto Rico's own municipal
bankruptcy laws because such laws are preempted by section 903(l)
of the Bankruptcy Code. In its opinion, the First Circuit
wrote:
In denying Puerto Rico the power to choose federal Chapter 9
relief, Congress has retained for itself the authority to decide
which solution best navigates the gauntlet in Puerto Rico's
case. The 1984 amendment ensures Congress's ability to do so by
preventing Puerto Rico from strategically employing federal Chapter
9 relief under § 109(c), and from strategically enacting its
own version under § 903(1), to avoid such options as Congress
may choose. . . . We must respect Congress's decision to retain
this authority.
In a concurring opinion, circuit judge Juan Torruella stated that
the 1984 amendments to the Bankruptcy Code, which for the first
time prohibited Puerto Rico's instrumentalities from seeking
bankruptcy protection, appear to lack a rational basis and may be
constitutionally invalid. According to Judge Torruella:
Not only do [the 1984 amendments] attempt to establish bankruptcy
legislation that is not uniform with regards to the rest of the
United States, thus violating the uniformity requirement of the
Bankruptcy Clause of the Constitution, . . . but they also
contravene both the Supreme Court's and this circuit's
jurisprudence in that there exists no rational basis or clear
policy reasons for their enactment.
On July 8, 2015, Judge Francisco A. Besosa of the U.S. District
Court for the District of Puerto Rico, in light of the First
Circuit's ruling that the Recovery Act is unconstitutional,
permanently enjoined government authorities from attempting to
enforce the restructuring law. See BlueMountain Capital
Management LLC v. García-Padilla, No. 14-01569 (D.P.R.
July 8, 2015), and Franklin California Tax-Free Trust et al. v.
Commonwealth of Puerto Rico, No. 14-1518 (D.P.R. July 8,
2015).
The government of Puerto Rico announced on July 9, 2015, that it
would seek to appeal the First Circuit's ruling to the U.S.
Supreme Court. In a written statement, Justice Secretary
César Miranda explained that "[w]e are turning to the
Supreme Court because we believe that the First Circuit Court of
Appeals decision was wrong in that it validates an irrational
action by Congress to exclude Puerto Rico from the application of
Chapter 9 of the U.S. Bankruptcy Code." Miranda further noted
that "[t]his action—without any basis in legislative
precedent—continues to seriously hurt Puerto Rico's
interests."
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