Use of the Local Law Advantage in the Restructuring of European Sovereign Bonds

Abstract

Emerging market sovereigns issue bonds in the international capital markets governed by a foreign legal regime such as the law of England or New York State.European sovereigns, however, have been able to issue bonds governed by the issuer’s own law.In the event of a future financial crisis, this gives European sovereign issuers the ability to pass local legislation that will facilitate an eventual restructuring of their bonds -- the “local law advantage.”Greece did this in 2012 as part of a restructuring of €206 billion of Greek Government bonds.The validity of the revisions to Greek law enacted in 2012 by the Greek Parliament has been upheld in multiple judicial challenges (in Greece, Germany, Austria and before the European Court of Human Rights), as well in a major ICSID arbitration.This raises the question of whether other European sovereigns enjoying the local law advantage over their bonds can, in an emergency, rely on the power of their own legislatures to amend local law in order to facilitate a future restructuring of those instruments