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Greek Debt Restructuring and Investment Treaty Arbitration: Jurisdictional stumbling blocks for foreign investors

Anna Mitsou* Draft 12.2.20161

Introduction

In February 2012 Greece launched a sovereign debt restructuring, which was the largest in history covering approximately 206 billion euros of public debt and the first of a Eurozone member state. Private bondholders agreed to swap their Greek sovereign bonds with a bundle of new securities consisting of new government bonds of substantially lesser nominal value and much longer maturities and securities issued by the EFSF, whereas Greece received a second bail-out by “Troika” as financial support in order to implement the so-called “PSI” (Private sector Involvement) and deal with its repercussions. As a result of the terms of the offer, the notional haircut for investors this sovereign debt restructuring presented was equivalent to 53,5%.2

When the deal was completed, it was considered a success since the State avoided declaring insolvency, because if the PSI had not taken place, the government would not have been in a position to pay out bonds of face value up to 14 billion euros reaching maturity in March, and also having taken into account the high participation of the bondholders and the size of the debt relief, which amounted to approximately 107 billion euros,3 with little market disruption.

From a legal perspective, the Greek PSI presented certain particularities in comparison to past sovereign debt restructurings, mainly the fact that Law 4050/2012 (the so-called Greek Bondholder Act) inserted unilaterally and retrospectively a Collective Action Clause (“CAC”) to existing sovereign bonds governed by Greek law, which had as an effect that minority bondholders found themselves bound by the majority’s decision to accept the bond exchange offer of the Greek State. Many dissatisfied investors of Greek government bonds bound by the decision of the majority of bondholders, filled applications for annulment of the administrative acts issued under the authorisation of the Greek Bondholder Act before the Council of Sate. The supreme administrative court of Greece dismissed the applications for annulment of the said administrative acts, by majority voting in plenary session, finding that overriding reasons of public interest necessitated the adoption of the Greek Bondholder Act, which is in compliance with the rule of law and in line with the Greek Constitution and the provisions of the European Convention of Human Rights.4

Foreign investors complaining about losses incurred by the Greek haircut sought redress before their domestic courts against the Greek State while others had recourse to investment treaty arbitration, invoking investor protection provisions of the Bilateral Investment Treaties Greece has signed with other countries. Recently, on April 9, 2015 an ICSID tribunal dismissed for lack of jurisdiction the claims of Poštová Banka A.S. (a Slovak entity) and its shareholder Istrokapital S.E. (a Cypriot entity) against Greece. The Tribunal adopted a reasoning similar to that of the Council of State in relation the kind of rights Postova Banka held in dematerialized Greek sovereign debt and concluded that such holdings do not fall within the definition of “investment” provided for in article 1 (1) of the

* Adjunct Lecturer at the Hellenic Open University, Phd (University of Athens), LLM (Queen Mary and Westfield College), Lawyer. 1 This paper was presented at a congress that took place in Thessaloniki, on 6-7 November 2015, funded

by IKYDA program. Full references and bibliographical information on the final version of this paper. 2 Reuters, Factbox: Terms of the Greek bond swap laid bare (7 March 2012) at http://www.reuters.com/article/2012/03/07/us-greece-swap-factbox-idUSTRE8260K620120307. 3 The substantial reduction of the debt however, cannot be estimated precisely, since there should also be taken into account the interest rates of the new bonds (which are the higher, the longer the maturity of the new bonds is), the necessary financing given for the recapitalization of Greek banks from the EFSF after the PSI, which was approximately 25 billion euros and in general the total cost for the completion of the process. See Zettelmeyer, Trebesch, and Gulati, Greek Debt Restructuring: An autopsy, August 2013, pp. 22 and 24. 4 Decisions 1116 and 1117/2014 of the Plenary Session of the Council of State.

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Greek-Slovakia BIT. Notably the tribunal looked through the wording of the BIT and analysed specifically the provisions of Greek legislation, mainly of Law 2198/1994 concerning the setting up of the “System For Monitoring Transactions in Book-entry Securities” and concluded, inter alia, that there is no contractual relationship between the State and the end-investor and, hence, no “claim to money” as required by article 1 (1) (c) of the Slovakia-BIT and, thus, no protected investment of Postova Banka against the State.

The award may be seen as a departure from previous investor-state disputes on indirect investment, namely from the well-known Abaclat case, where the arbitral tribunal made a determination on jurisdiction and admissibility in August 2001, characterizing sovereign bonds as “investments” under the Italian-Argentinian BIT. 5This recent case in Postova Bank is probably one of many to follow challenging the legality of the Greek PSI and even though, the doctrine of “stare decisis” or binding precedent arising from common law is not applicable in international investment law, it is a landmark award that may be adopted by ICSID tribunals to adjudicate similar cases concerning the Greek PSI. This paper analyzes in section I the salient features of the Greek sovereign debt restructuring and examines whether certain provisions of the Greek Bondholder Act may constitute an infringement of the main substantial investor protection rules provided for in most of the BITs. Special emphasis is given, though, on the second part of the paper under II, where the author examines the jurisdictional hurdles claimants faced in the Poštová Banka case and questions the authoritative reasoning of the award by analyzing the Greek law position concerning the legal nature of dematerialized government bonds. The decision highlights the interesting interplay between municipal law and public international law when interpreting Treaty provisions that co-exist and interact with municipal law. The article concludes with the possible implications this award entails for future debt restructurings.

I. Possible infringements of substantive investor protection rules under the BITs by the Greek PSI A. Sovereign debt restructuring and investor protection under the BITs

Government borrowing, mainly, through the issuance of sovereign bonds traded in

international capital markets is probably the main method to finance government operations. However, when a financial crisis engulfs a state, there is always a high risk of default on its sovereign debt. In order to avoid a disorderly insolvency that would have lead to serious socio-economic deadlocks, governments usually have recourse to sovereign debt restructurings (SDRs). An SDR or a “workout” is a change to debt contracts that is negotiated between creditors and the State.6 Workouts usually reduce the face value of the debt via ‘swaps’ where new bonds with lower interest rates and longer maturities are exchanged for the defaulted bonds.7

The are always some “holdouts” in SDRs i.e. investors who refuse to negotiate and demand their debt instruments be honoured in full. Holdouts may be “vulture” funds, which have purchased debt at low prices, driven down by payment problems.8 By accumulating a high percentage of bonds, they can justify the high costs of litigation.9 As discussed below, in the Greek scenario, holdout creditors were reimbursed on the face value of their initial bonds, whereas dissenting or non-participating investors who were trapped in the majority’s decision by the retrospectively inserted Collective Action Clause (CACs) in the initial bonds, were the ones that brought claims against Greece before domestic courts and arbitration tribunals.

The advantage for foreign investors compared to domestic investors of the host state is that they can often bring a claim before arbitration tribunals, in case there is in place a Bilateral Investment Treaty (BIT) between their home state and the infringing host state. A BIT is a legally binding international agreement between two states where they each promise reciprocally to observe the standards laid down by the treaty in their dealings with investors from the other

5 Abaclat and Others v. Argentina, 2011, ICSID CASE NO. ARB/07/5. 6 IIA, Sovereign Debt Restructuring and International Investment Agreements, 2011, p.2 7 I. Glinavos, The Greek “Haircut” and Investor Arbitration under BIT’s, 2012, Draft version, p.2. 8 IIA, ibid, p. 2. 9 Ibid, p.2.

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State.10 The majority of BITs allow investors to initiate arbitration proceedings under the auspices of the World Bank’s International Center for the Settlement of Investment Disputes (ICSID) or ad hoc arbitration under the Arbitration Rules of the United Nations Committee on International Trade Law (UNCITRAL).11

Setting aside the thorny issues concerning jurisdiction of the arbitration tribunal under the BIT and the ICSID Convention, discussed in detail under II of this paper, BIT agreements provide for numerous investor protection standards, the most relevant of which for bondholders are the following:12

a) The State’s obligation to pay prompt and adequate compensation in case of an ‘expropriation”. The word “expropriation” encompasses not only direct expropriation which is the case of a formal transfer of title by the investor to the State but also “indirect expropriation”, a term which is not clearly defined in international law, and it is supposed to cover all situations where the State, by means of administrative or legislative procedures, provokes a unilateral change in contact conditions with the effect that the investor is unable to recover the expected economic benefits of his investment under the original framework.13 Under international law, not all state measures interfering with property constitute “indirect expropriation” and thus give rise to a claim for compensation, but merely measures that are “tantamount to expropriation’.14 An arbitration tribunal has found that even a very significant loss in the value of shares did not constitute a sufficient loss of enjoyment and use of the asset to constitute an expropriation.15

b) The fair and equitable treatment guarantee (FET). Under the FET standard protection, which is not clearly defined in BITs, investors are entitled to expect States to conduct their affairs transparently and to insist that States maintain a reasonably stable regulatory and legal environment. Investors have successfully argued a breach of the FET standard in circumstances where the conduct of the host State prompted legitimate expectations of the investors.

c) The State’s obligation to treat investors from one State no less favourable than nationals and investors from other States of from the host state (‘Most Favoured Nation Treatment’- MFN). The MFN requirement, found in most BITs, allows investors to insist on being treated as investors from other States are treated. On the basis of an MFN provision, tribunals have allowed investors to import substantive treaty protection available in a BIT between the host state and a State unrelated ot the investor into his BIT with the host State.16

d) The State’s obligation to satisfy its contractual obligations and undertakings (‘umbrella clause’). It is in principle admitted that with respect to a BIT claim an arbitral tribunal has no jurisdiction where the claim at stake is a pure contract claim. This is because a BIT is not meant to correct or replace contractual remedies, and in particular it is not meant to serve as a substitute to judicial or arbitral proceedings arising from contract claims. Within the context of claims arising from a contractual relationship, the tribunal‘s jurisdiction in relation to BIT claims is in principle only given where, in addition to the alleged breach of contract, the Host State further breaches obligations it undertook under a relevant treaty. 17 As an exception to this principle, a BIT sometimes provides for a so-called ―Umbrella Clause, which requires a State to observe any obligation arising from particular commitments it has entered into with regard to investments. Claimants have argued that the inclusion of such an umbrella clause provides a basis for jurisdiction over claims for breach of contract as such.

e) Compensation: If bondholders succeed in their claim that the host State has breached its duties under the relevant BIT, an arbitration tribunal may award them compensation. It is a principle of international law that the aggrieved investor should, to the extent possible, be restored to his ex ante position, so as to repair all the consequences of the illegal acts of the

10 Glinavos, ibid, p.3 citing Muchlinski 1999, p. 617. See also, C. Hoffman, Greek Debt Restructuring and Abaclat v. Argentina-The impact of Bilateral Investment Treaties (BITs) on the Greek default, 2012. 11 See for instance article 10 of the Slovakia-Greek BIT. 12 See in detail B. Kasalowskh and S. Miron, Can Collective Action Clauses in Sovereign Bonds Limit Litigation Risks for States? In IFLS, Collective Action Clauses and the Restructuring of Sovereign Debt (edts) K. Bauer-A.Cahn, P. Kenadjan, 2013, p.89-95. 13 F. Gelmetti, Indirect expropriation under international investment law, pp.23-4, 2012-3, available at www. academia.edu. 14 See OECD Report, “Indirect expropriation” and the “Right to Regulate” in International Law, 2004, p.3. 15 see CMS Gas Transmisition Company….). 16 Kasalowskh-Miron, ibid p. 92. 17 See Abaclat and others par. 316.

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State.18 In this case, compensation amounts to the face value of the bonds that were exchanged during the SDR. However, it is argued that the particularities of a SDR might necessitate a departure from this principle. In these cases of investment arbitration, the act of the State that results in expropriation may be within the regulatory discretion of the State and at the same time may give rise to liability under the applicable BIT. As a result, it is argued that the most commonly employed standard of compensation in investment treaty arbitration is the “fair market value” standard, which is difficult to determine in practice especially during a SDR.19

From a policy perspective, many prominent scholars criticize investment arbitration over sovereign debt restructuring because of the negative implications it may have on the efforts of a country in financial distress to recover. One of the main arguments against investment arbitration over SDRs is that it may hinder the ability of debtor nations and their creditors to negotiate issues of public debt and this, in turn, could have additional costs to the process of sovereign debt restructuring. Investors who know they have the alternative of investment treaty arbitration may opt out of the restructuring process wishing to receive higher compensation because of an arbitration award in their favor. On the other hand, it is argued that investment arbitration may deter states from “opportunistic defaults” on their sovereign debt. These kinds of defaults occur exceptionally though, when debtors deliberately fail to make payment of their debts for which they are able to pay. Besides, the possibility of investment arbitration may exercise pressure to states in distress to negotiate fairer and more equitable SDRs with their creditors, taking into account the particular characteristics of the investors and even the terms of each bond issuance. One should wonder why private individuals or social security funds who invest in sovereign bonds for saving purposes should have the same or even worse treatment than professional investors or “vulture funds” who may even receive benefits from a SDR, in case for instance they have an insurance coverage through CDS or may receive financial support by a state or or a supranational entity, as has happened in the Greek scenario where certain Greek banks received recapitalization funding from the EFSF, following the completion of the PSI. Besides, there is always the traditional litigation route especially for foreign investors who may choose to initiate litigation proceedings before their domestic courts against the sovereign state. The author is, thus, of the opinion that the scope of application of investment treaty arbitration should not a priori exclude cases concerning SDRs; instead, the context of the BIT in question and the factual circumstances of each case set a solid basis for arbitrators to adjudicate whether arbitration tribunals have jurisdiction to hear a certain dispute between investors and the host state and whether there has been a breach of certain substantial investor protection provisions. B. The salient features of the Greek sovereign debt restructuring

The Greek PSI presents some particularities from a legal perspective compared to other

similar cases of sovereign debt restructuring, which may infringe certain provisions of the BITs relating to foreign investor protection, discussed in concrete terms below.

a) Unilateral and retrospective insertion of CACs to Greek-law bonds

The use of CACs in sovereign bond issues has been recommended in the past by the G-10,20 the IMF21 and recently by the EU22. In general, CACs’ settle the “collective action problem”, which arises when a state has many dispersed international investors since it permits the State to amend certain characteristics of the sovereign bonds, if it accomplishes the acceptance for the amendment by the majority of bond-holders.

In the case of the Greek PSI, the large majority of Greek sovereign bonds which were swapped with the new ones were governed by Greek law (above 86% of outstanding principal) and did not include ab initio the so-called “Collective Action Clause” or any similar term which would allow for the restructuring of the debt by decision of the majority of the bond-holders. In

18 Kasolowski-Miron, ibid p.93, see also Case Concerning the Factory at Chrozow, Germany v. Poland, 1928, PCIJ, Waibel….

19 See inter alia I. Glinavos, Haircut Undone? The Greek Drama and Prospects for Investment Arbitration, JIDS, 2014, (5), p.493. 20 Report of the G-10 Working Group on Contractual Clauses, September 2002. 21 IMF, Collective Action Clauses in Sovereign Bond Contracts—Encouraging Greater Use, 2002. 22 EU Model CAC, 2012.

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contrast, CACs were initially included in the Greek sovereign bonds governed by English law23. Since no clause of this kind was included in the originally issued bonds governed by Greek law, any amendment of their terms and exchange with new ones would have required the consent of all bondholders. This is because each bond reflects a separate contractual claim against the issuer and according to the internationally accepted principle of sanctity of contracts (“pacta sunt servanda”), each separate creditor-bondholder has to agree to the amendment of the terms of the bond loan agreement.24 Since these securities were governed by Greek law, the unilateral insertion of CACs on the bond terms by the the Greek Bondholder Act made possible their amendment with a simple majority participation (i.e. quorum of 50%) of all bondholders and increased majority voting of the participating bondholders (66,6% of the bondholders present).

In particular the Greek Bondholder Act provided that an amendment of the “eligible titles” will be approved by the bondholders, “if holders of at least one half (1/2) of the aggregate outstanding principle of all the eligible titles determined in the relevant invitation of the Ministerial Council participate in the modification process (“participating principal amount”) and at least two thirds (2/3) of the participating principal amount consent to the proposed amendment.” (article 1 par.4). Hence, the quorum and majority requirements were set at a low level and on an aggregate basis.

In particular, the CAC’s inserted into Greek-law bonds were different from the CACs contained in the foreign-law Greek bonds, and much simpler. The Greek CACs provided for a full aggregation clause, in the sense that Greek-law bonds required agreement among all bondholders aggregated across all of the issuances of the sovereign debt, whereas the foreign-law Greek bonds provided for a double majority or “double voting” i.e. majority voting on a series-by-series basis and majority on an aggregated basis in order to agree to an amendment. 25 The aggregation clause or the “single voting system” included in the “retrofit” CACs clauses accentuated the disparity between the Greek-law and foreign-law bonds and explained why the participation percentage of the Greek-law bonds reached 85% and subsequently the CACs were activated so as to cancel all Greek law bonds, whereas some issues of Foreign-Law bonds (under English, Swiss and Japanese law) did not reach the required majority (i.e. only reached 69% where 75% was required) to adhere to the amendment.26 In fact, of the 36 bonds governed by English law with CACs that were eligible to participate in the debt exchange, only 17 were successfully restructured using CACs.27 The operation of the CACs in the remaining bond issues of Greek government debt under foreign law was effectively neutralized by holdout creditors, resulting in unrestructured claims of about Euro 6.5 billion, accounting for 30% of the total value of debt governed by foreign law.28 It is evident that without such an aggregation in the Greek-law bonds, holdout creditors may have been in a position to obtain a blocking position in particular bond issuances that would have prevented a series-by-series CACs from operating in those issuances.29

The difference in the CACs provision of the Greek-law versus the foreign-law bonds had as a result that hold-out creditors of the foreign Greek sovereign bonds requested payment in full of the face value of their bonds. The hold-out creditors were holders of Greek sovereign bonds, governed by foreign law, who either denied the exchange offer, or were not invited to amend their bonds (“consent solicitation”), due to reasons of local laws and regulations. Contrary to other cases of sovereign debt restructuring, where the hold-out investors did not

23 Zettelmeyer, Trebesch, and Gulati, ibid, p. 11 24 See C.Hofmann, Enfranchisment and Disenfranchisment in Collective Action Clauses, in IFLS,

Collective Action Clauses and the Restructuring of Sovereign Debt, (edts) K. Bauer-A.Cahn, P. Kenadjan, 2013, p. 45 25 See Y. Li, Policy Implications of Poštová Tribunal’s Jurisdiction over Sovereign Bonds: Bankruptcy Cram-down and ICSID Arbitration, Journal of Bankruptcy Law and Practice (forthcoming). Available also at ssrn. papers. 26 P. Kenadjian, The Aggregation Clause in Euro Area Government Securities: Game Changer of Flavor of the Month?-Background and the Greek experience, in “Collective Action Clauses and the Restructuring of Sovereign Debt”, ILFS, p. 125 and 129. 27 See also M. Miller and D. Thomas, Eurozone Sovereign Debt restructuring: keeping the vultures at bay,

Oxford Review of Economic Policy, Volume 29, Number 4, 2013, p. 747. 28 See IMF Strengthening the contractual framework to address Collective Action Problems in Sovereign Debt Restructuring, Oct. 2014, p.5. 29 See also IMF ibid p. 19.

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receive repayment of their bonds and proceeded to legal battles,30 the holdout creditors of the Greek sovereign bonds governed by foreign law received the full face value of their bonds after the consummation of the PSI.31 This despite the fact that the Greek government during the launch of the debt exchange overtly stated that it wouldn’t pay any holdout creditors.

From a BIT perspective, the first question is whether the CAC clause may give rise to a simple contractual claim or a treaty claim. Considering that CACs were introduce by a legislative act retrospectively in the bond terms, the dispute that arises is a treaty claim. Secondly, it is true that the Greek State treated holders of foreign-law Greek sovereign bond more favourably than holders of bond governed by Greek law, contravening, thus, the MFN treatment enshrined in most BITs. The Greek Bondholder Act inserted a retrospective CAC without the consent of the bondholders in order to pressure them to participate in the bond restructuring. Instead, foreign law government bonds already contained CACs which were not designed to function the same way as the CACs inserted retrospectively by the Greek Bondholder Act (voting on a series-by-series basis), as explained in detail above. One potential argument in Greece’s defence could be that the losses imposed on the haircut do not stem from a sovereign act, in this case the Greek Bondholder Act, that would trigger treaty claims, but by the decision of the majority of the bondholders that reached the super-majority needed to activate the CAC.32 As Hofman argues, it is merely formalistic to make the distinction between the sovereign act and the bondholder’s decision because it ignores the predetermined outcome of the law- since the Greek State already prior to launching the PSI had agreed with its major bondholders- as well as the obvious intentions of the bondholders. 33 Besides, it is no coincidence that on 9.3.2012, the day that it was announced that the required majority for the amendment of the titles had been reached, the International Swaps and Derivatives Association (ISDA) decided unanimously that the programme of the exchange of the bonds constitutes a ‘credit event’,34evidently having taken into account that the debt restructuring had a coercive rather than a voluntary character for bondholders.

b) Exception of some creditors from the process of the PSI

As to the scope ratione personae, the Greek Bondholder Act did not distinguish between categories of “investors” in order to include all those investors on behalf of whom the Bondholders hold securities accounts in the system of HDAT, such as insurance funds, universities, and other legal persons governed by public law. Even those natural persons who held Greek sovereign bonds were not exempted from the PSI procedure, since it was assumed that there was the danger of activation of the pari passu clause which was included in the Greek bonds governed by foreign law (the bonds which were governed by the Greek law did not include that term). Hence, the Greek offer was made as a “one-size-fits all” offer, without differentiating according to the nature of the investor or the terms of the bonds (maturity e.t.c.). An exemption was made in case of the ECB, which had bought a significant amount of Greek sovereign bonds during the Eurozone crisis, as well as of other central banks that held Greek bonds that were not invited to participate in the PSI. It should be stressed that the ECB was the most prominent bond-holder, since it held over 20% of the total amount of the outstanding principal35. The protection which was offered to the ECB did not stem from the Greek Bondholder Act, but from the exchange in the framework of the swap which realized by the ECB just before the PSI, on February 17, 2012, when it announced that it exchanges the Greek sovereign bonds to new ones which are excluded from the Collective Act Clause.

30 For the Argentine case, see J.F.Hornbeck, Argentina’s Defaulted Sovereign Debt: Dealing with the “Holdouts”, February 6, 2013, CRS Report for Congress. 31 See FT, Holdouts get paid, the rest can pray http://www.ft.com/intl/cms/s/0/7858e95c-944e-11e1-bb0d-00144feab49a.html#axzz3G455JgIr, May 13, 2012 KATHIMERINI 06.07.2013, Greek Economy, The bonds outside the PSI have cost the Greek State more than 2.8 billion euros. 32 See I. Glinavos, Haircut Undone? The Greek Drama and Prospects for Investment Arbitration, Journal of International Dispute Settlement, 2014, p. 485. 33 C. Hofmann “A Legal Analysis of the Euro Zone Crisis” (2013), 18 (3) Fordham Journal of Corporate and Financial Law, n. 53, Glinavos, ibid p. 285. 34 See FT, Holdouts get paid, the rest can pray http://www.ft.com/intl/cms/s/0/7858e95c-944e-11e1-bb0d-00144feab49a.html#axzz3G455JgIr 35 The majority of the bonds were purchased during 2010 through the ECB’s Secondary Market Programme (SMP).

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This discrimination in favour of the ECB meant that the latter had priority over the private sector bondholders. Foreign investors bringing a claim before an ICSID Tribunal may argue that this discrimination violated the Treaty principles of EFT and MFN. An argument against the investors could be that ECB and the other central banks (NCBs) of the Eurosystem participated, directly or indirectly in the bail-out programs for Greece and their exemption was a precondition for the participation in the second bail-out program, following the PSI.36 Indeed, recently the General Court of the EU adjudicated, inter alia, that the general principle of equal treatment cannot apply since the private creditors and the ECB (as well as NCBs of the Eurosystem) were not in a comparable situation, since the ECB during the Greek financial crisis was exclusively guided by public interest objectives, such as the objective of safeguarding price stability and the objective relating to the sound management of monetary policy. 37 c) Vote of the “bondholders” and presumed consent of the “investors”

For the purposes of the PSI, a provision was inserted which did not require the vote of the end-investor, who was the beneficiary of the “eligible title”, but only of the intermediary who kept the account on his own name and on behalf of the investor as a participant in the Electronic Secondary Securities Market (“HDAT” or “the System”), where clearing and settlement of transactions on Greek sovereign bonds takes place.

In particular, the Greek Bondholder Act defines “bondholder” as the Participant in the System for Monitoring Transactions in Book-entry Securities (the "System") rather than as the beneficiaries of the bonds (par.1 Αrt.6 of Law 2198/1994 (art.1, par. F’) and also defines “investor” as the owner of the bond who has a claim on or under the dematerialised security, according to the provisions of Law 2198/1994. The Law also states that the participation of the bondholder in the decision-making process for the amendment of the eligible titles “is considered to take place according to the guidelines and the presumed consent of the investor” and that the Administrator, the Greek State, and their authorized representatives are not liable to the investor and to any other third party if the bondholder participated in the process without the consent of the investor or against his/her instructions (Art. 1, par.7). Furthermore, it is expressly stipulated that the implementation the Greek Bondholder Act services the public interest and does not generate or activate any contractual right or right provided for in the law against the issuer or the guarantor of the titles (article 1 par.11).

By this manner, on the one hand the process of the PSI was accelerated, but on the other, the beneficial owners of the titles were deprived of their right to vote against the insertion of the retroactive introduction of the Collective Action Clause to the “eligible titles” they actually owned and, subsequently, to their exchange with the new bundle of securities offered by the Greek State.

As far as the definition of “bondholders” in the Greek Bondholder Act is concerned, the European Central Bank (ECB) in its 17.2.2012 Opinion expressed its reservations, highlighting that, although the provisions define as “bondholders”, instead of the beneficiaries, the Participants in the System, they do not specify how the latter will vote for the modification of the eligible titles, especially in case they do not have active portfolio management rights over them, or how the voting is to take place, both procedurally and substantively. The ECB Opinion further notes that, for reasons of legal certainty and in order to protect the “reasonable expectations” of the beneficiaries of the eligible titles, the provisions should include specific details.38

Foreign investors bringing a claim under the applicable BIT may claim that the deprivation of investors’ right to vote and also the subsequent diminution of their holdings to a percentage equal to 53,5% constitutes an indirect expropriation giving them right to ask for compensation.

III. Jurisdictional hurdles for investors: The Poštová Banka case Before we examine the Poštová Banka case and its consequences for bondholders of

Greek sovereign debt, we need to examine probably the most crucial yet contested jurisdictional requirement for ICSID arbitration, i.e. whether the dispute relates to an investment

36 See Hoffman, Greek Debt Restructuring and Abaclat v. Argentina-The impact of Bilateral Investment Treaties (BITs) on the Greek default, October 3,2012, available on the internet. 37 General Court of the EU, Press Release No 119/15, Luxembourg 7 October 2015, Judgement in Case T-79/13. 38 Opinion of the European Central bank of 17 February 2012 on the terms of securities issued or guaranteed by the Hellenic Republic. CON 2012/12.

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that falls within the scope of application of the BIT in question and article 25 of the ICSID Convention. 39

A. Definition of ‘Investment’ under the BITs and article 25 of ICSID The ICSID Tribunal‘s jurisdiction must be based on the relevant provisions of the applicable

BIT as well as the jurisdictional and procedural requirements provided for in Article 25 ICSID Convention. Because article 25 is neutral concerning the definition of ‘investment’ ICISD tribunals have adopted three approaches to delineate the interplay between the definition of “investment” under the BIT and article 25 of ICSID: the “double-barreled”, the objective and the subjective tests.

A number of arbitral tribunals hold the view that whether or not a dispute at stake relates to an investment is subject to a two-fold test, i.e., a sort of a ”double barreled” test: firstly it must be examined whether the alleged investment fits into the definition of investment as provided by the relevant BIT, which reflects the limits of the State‘s consent; subsequently, the alleged investment must also correspond to the meaning of investment as contemplated by the ICSID Convention, which sets the limits of ICSID‘s jurisdiction and the Tribunal‘s competence40.

The double barrel test was established after the award of an ICSID Tribunal in the Salini case, which set forth four criteria to meet the investment notion of article 25, that apply cumulatively; a) a contribution (in cash, in kind or in labor), b) certain duration of performance, c) participation in the risks of the transaction and d) a contribution to the economic development of the host state.41 However, it is unclear how and when these characteristics should actually be applied and how they may help in distinguishing an investment from an ordinary commercial transaction. Besides, even when applying the “double barreled’ test, tribunals have disagreed on the approach to be taken, considering that the ICISD Convention does not provide a definition of “investment”. Under the objective approach, the Tribunal verifies whether the investment under litigation meets the criteria of art. 25 of the ICSID Convention, which is considered to set the outer limits of the arbitration tribunals jurisdiction and does not require the consent of the parties. The term investment has an objective inherent meaning, which presents some or all the Salini criteria, depending on the approach adopted by the ICSID Tribunal. If there is no protected investment under article 25 of the ICISD, then the definition given in the BIT is irrelevant for the purpose to establish jurisdiction.42

Finally, under the subjective approach, which is more liberal, arbitrators rely on the will of the parties as expressed in the definition of “investment” contained in the applicable BIT. Arbitrators require the asset to correspond to the requirements of the BIT and do not apply any requirements to be met for the purposes of the ICSID Convention.43

B. Sovereign Bonds as “Investments” under the BIT and article 25 ICSID

Most BITs define “investment” as “every kind of asset” and provide for a non-exhaustive

list of protected investments that typically include, shares, loans, claims to money, other financial participations.44 Some scholars support, that because of the wide and non-exhaustive

39 Article 25 par (1) provides that “The jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment, between a Contracting State (or any constituent subdivision or agency of a Contracting State designated to the Centre by that State) and a national of another Contracting State, which the parties to the dispute consent in writing to submit to the Centre. When the parties have given their consent, no party may withdraw its consent unilaterally’. .40 In SGS v. Philipines, the tribunal explains that the “jurisdiction of the Center is determined jointly by the BIT and the ICSID Convention’.40 41 [ICSID 2001] ARB/PP/4, 609 (622) para 52. 42 Romak SA v. Uzbekistan, UNCITRAL, PCA Case No. AA280, paras 229-230. 43 See A.Viterbo, Sovereign Debt Restructuring and Investment Protection, in Foreign Investment, International Law and Common Concerns (eds) 2013, p.343, R.Gömmel, Investing into North African Solar. A legal framework for Risks, 2015, pp.177-9. 44 B. Kaslowsky and S. Miron, ibid … p. 88.

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way in which most BITs have come to define investments, an argument can be made for the inclusion of sovereign bonds within their ambit.45

Recent ICSID tribunal awards on jurisdiction adhere to this liberal view of investment and have generally accepted jurisdiction over a broad spectrum of economic activity.46 In Romak v. Venezuela47 the Tribunal relied on use of the terms “include” and “every kind of asset” to conclude that the definition provided in the BIT in that case was not exhaustive and didn’t constitute an all-encompassing definition of an investment,48 in fact “they were clearly intended as illustrations”49 and that “there may well exist categories different from those mentioned in the list which, nevertheless, could properly be considered investments protected under the BIT.”50 Accordingly, there must be a benchmark against which to assess those non-listed assets or categories of assets in order to determine whether they constitute an “investment” within the meaning of the BIT”.51 In interpreting a similar provision another Tribunal52 noted that ‘the specific categories of investment included in the definition are included as examples rather than with the purpose of excluding those which are not listed’.53 54

Furthermore, the ICSID Tribunals have adjudicated in Fedax v. Venezuela, that promissory notes fall within the definition of “investment” both under article 25 of the ICSID Convention, as well as under the BIT Treaty. The ICSID Tribunal in Fedax v. Venezuela noted that “A broad definition of investment such as that included in the Agreement is not at all an exceptional situation. On the contrary, most contemporary bilateral treaties of this kind refer to “every kind of asset” or to “all assets,” including the listing of examples that can qualify for coverage; claims to money and to any performance having a financial value are prominent features of such listings”. In Fedax the Tribunal relied upon the definition of ‘investment’ under the BIT (defined as “shall comprise every kind of asset and more particularly, though not exclusively…”) to conclude that the Contracting Parties to the Agreement intended a very broad meaning for the term “investment”.55

In Fedax, the tribunal listed some basic features typical to investment transactions that provide guidelines to the type of bond issue that would be covered by the Convention. A contribution, or indeed some kind of injection of funds, of a certain duration is required. Generally, ICSID Tribunals will need some form of evidence that the type of investment is not merely a short-term, occasional financial arrangement. It is unclear what minimum duration is required. 56In 2001, in Salini v Morocco, the tribunal discussed a length of about two to five years as an appropriate guideline. But, in Fedax it was held to be long enough if the duration of the investment extended beyond the fiscal year in which it was made, though this was based specifically on the terms of the domestic legislation under which the Republic of Venezuela had issued the promissory notes in question. By their nature, sovereign bond issues are unlikely to fall foul of the duration requirement. Bond maturity would usually range from one to 30 years or longer.57 In addition the Tribunal in Fedax dealt with the fact that the promissory notes had been purchased on the secondary market and found that the identity of the investor will change with every endorsement, the investment itself will remain constant and the issuer will enjoy a continuous credit benefit until the time the notes become due. To the extent that this credit is provided by foreign holder of the notes, it constitutes a foreign investment.58

45 Pranav Verma, Sovereign Default and Remedies Under International Law: Sovereign Bonds under BIT-I, available at https://nalsariblog.wordpress.com/2014/10/10/sovereign-default-and-remedies-under-international-law-soveriegn-bonds-under-bits-i/ 46 Peter Griffin and Ania Farren, How ICSID can protect sovereign bondholders, IFLR (2005), p.1. 47 Romak S.A. (Switzerland) and The Republic of Uzbekistan, PCA Case No. AA280. 48 Ibid at 180. 49 Ibid at 188. 50 Ibid at Id at 180. 51 Ibid at 137. 52 Siemens v Argentina, ICSID Case No. ARB/02/8 (Decision on Jurisdiction) (3 August 2004), Germany-Argentina BIT 53 Ibid at 137. 54 For the above paragraph see Pranav Verma, ibid. 55 Pranav Verma, Sovereign Default and Remedies Under International Law: Sovereign Bonds under BIT- II. 56 Peter Griffin and Ania Farren, ibid. 57 Peter Griffin and Ania Farren, ibid. 58 I.Glinavos, Haircut Undone? The Greek Drama and Prospects for Investment Arbitration, Journal of International Dispute Settlement, 2014, p.478.

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Again in CSOB v Slovak Republic a consolidation agreement between a bank and the Ministry of Finance provided for the assignment of certain non-receivables to a specially constituted Slovak collection company that was to be financed by loan. Slovakia undertook to make good the collection company’s losses, enabling repayment of the loan to CSOB. The loan was held to constitute an investment, even though the claim was based on an obligation that, standing alone, did not qualify as an investment.59

Even more relevant in the present context is the Abaclat and others v Argentina case,60 which is the first ICSID case that deals with the jurisdictional issues on SDRs. This ongoing arbitration concerns some 60,000 Italian bondholders suing Argentina under the Argentina-Italian BIT in connection with the State’s default on its sovereign debt in December 2001 and the debt restructuring that took place by the application of the Emergency Act and the Exchange Offer of 2005. In its defense, Argentina argued that the bonds did not qualify as “investments” under the BIT, and also objected to the admissibility of the mass claim from the 60,000 bondholders under the BIT. The Tribunal noted that the sole criterion as to whether the bonds at issue constituted an “investment” for the purposes of the ICSID Convention is whether the bonds fell within the definition of “investment” provided for in the BIT. The Tribunal stated that in relation to a claim which stems from a BIT, it does not have any jurisdiction when that claim of the applicant results exclusively from the violation of the agreement (contract claim), since the BIT is not intended to correct or substitute the legal consequences foreseen in that case. However, it adds that when the provisions of an agreement are unilaterally amended by a state act, the claim of the applicant should not be considered as of purely contractual nature arising from that agreement. The court decided to implement this exemption when the conditions and the behaviour of the host state seemed to arise from an act of state power (acta iure imperil)61.

Furthermore, the majority opinion of the Tribunal confirmed that Argentina’s sovereign bonds qualified as “investments” under the Argentina-Italy BIT.62 According to the Tribunal the term ”obligation” in lit. (c) of Article 1 of the BIT may be understood as referring to an economic value incorporated into a credit title representing a loan. Similarly, the term “title” in lit. (c) of Article 1 would be more accurately translated into the English term of “security”, which means nothing more than a fungible, negotiable instrument representing financial value. 63

A further issue for the ICSID tribunal to examine is whether the bond purchases constitute an investment made ‘in the territory of the other Contracting Party’. In this respect, the Tribunal in Abaclat found that there is no distinction between government bonds and security entitlements held in book-entry form in a universal depository such as Clearstream, since they are part and parcel of the same investment operation.64 In particular, the Tribunal finds that the connection between the security entitlements and the bonds could not be seen as so remote as to consider that the dispute is not directly related to an investment, since the dispute related primarily to the rights arising from Claimants‘ security entitlements. The reasons for this conclusion are that: a) The bonds at stake were always meant to be divided into smaller negotiable economic values, i.e., securities. It has been sufficiently demonstrated by Claimants that the underwriters would not have subscribed to any of the bonds, without having previously ensured that the bonds were re-sellable to the Intermediaries and their end customers; b) The security entitlements are the result of the distribution process of the bonds through their division into a multitude of smaller securities representing each a part of the value of the relevant bond. The security entitlements have no value per se, i.e., independently of the bond; and c) The fact that the distribution process happens electronically, without the physical transfer of any title, does not change anything to the fact that rights effectively passed on to acquirers of security entitlements in the bonds.65

59 I.Glinavos, Haircut Undone? … ibid, p. 479. 60 Abaclat and others v The Argentine Republic, ICSID Case No. Arb/07/5, Decision on Jurisdiction and Admissibility, 4 July 2011. 61 Decision on the jurisdiction and the Admissibility of the Arbitration Court of the International Centre for Settlement of Investment Disputes, Washington D.C, Abaclat and Others v. the Argentine republic of 4 August 2011, par. 316-318. 62 Boris Kasolowsky and Smaranda Miron, Can Collective Action Clauses in Sovereign Bonds Limit Litigation Risks for States? In Collective Action Clauses and the Restructuring of Sovereign Debt ILFS 63 Ibid, at. 355. Note that lit. (c) of the Argentina-Italy BIT provides for “obligations, private or public titles or any other right to performances or services having economic value, including capitalized revenues”. 64 Hearing, at. 103-104. 65 Ibid,at. 358.

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C. The arbitral award in Poštová Banka The recent award in Poštová Banka A.S. and Istrokapital SE v. Greece in which the

Tribunal decided that the bonds purchased by Istrokapital and Poštová Bank did not fall within the definition of “investment” of Article 1 of the Greek-Slovakia BIT, came as a surprise given

the string of ICSID awards that have adopted a liberal view of investment66 and accepted

jurisdiction on sovereign debt. The claimants were Poštová banka, a.s. (Poštová banka), a Slovak bank, and its

shareholder Istrokapital SE, a company organized under Cypriot law. Poštová banka had acquired a total of €504 million in GGBs through several transactions on the secondary market in 2010, held through the universal securities depositary, Clearstream. Following the implementation of the PSI in the end of February 2012 and the subsequent haircut of GGBs, the claimants sued Greece before an ICSID tribunal on May 3, 2013 under the Slovakia–Greece and Cyprus–Greece bilateral investment treaties (BITs).

The tribunal focused on Greece’s two-fold objections to subject matter (ratione materiae) jurisdiction, concerning Istrokapital’s claims under the Cyprus–Greece BIT and Poštová banka’s claims under the Slovakia–Greece BIT and rejected the request for arbitration on the grounds that Istrokapital is not a “National of Another Contracting State” under article 25 (1) of the ICSID Convention and not a “protected investor” under the Cyprus-Greece BIT and Poštová’ bank holdings in GGBs do not constitute protected “investments”, under article 1 of the relevant BIT.

In particular, concerning Istrokapital the Tribunal extensively reviewed case law on whether shareholders have claims or rights in assets of companies in which they hold shares and, subsequently dismissed the claim since the shareholder does not have standing to pursue claims directly over the assets of the local company, as it has no legal right to such assets.67 Notably, the Tribunal showed that investment tribunals had generally affirmed their jurisdiction only with respect to the shareholders’ claims related to their shares.68 It followed that shareholders can bring claims for treaty violations stemming from actions taken against the assets of the company in which they hold shares only insofar as such actions affect the value of their shares.69 However, Istrokapital did not put forward this argument, and, consequently, its claim was bound to fail.70

More complicated was the issue whether the holding of Poštová Bank qualified as protected “investment” under the Greek-Slovakia BIT. Article 1 of the Greek-Slovakia BIT defines investment as “every kind of asset” followed by an non-exclusive list of examples that include “b) shares in and stock and debentures of a company and any other form of participation in a company, c) loans, claims to money or to any performance under contract having a financial value”.

The Tribunal assessed whether it had jurisdiction over Poštová Banka’s claims by applying the double-barreled test; it first examined whether the interests Poštová Banka held in the GGBs qualify as an investment under the Greek-Slovakia BIT. If there is no protected investment under the Greek-Slovakia BIT, then the dispute subject matter of this arbitration will not be a dispute relating to an investment, as required in article 10(1) of the Slovakia-Greek BIT, which contains the consent of the parties to arbitration, and therefore the dispute will not fall under the jurisdiction of the ICSID and the competence of the Tribunal according to article 25 of the ICSID Convention.71

As a preliminary point, the Tribunal observed that this provision should be construed by applying the rules of interpretation set out in Article 31 (1) and (2) of the Vienna Convention on the Law of the Treaties (VCLT). The Tribunal agrees with the Claimants that the concept of “investment” as contained in Article 1 of the BIT is a broad one (since it contains the wording “every kind of asset”), but this does not mean that investor-state tribunals are authorized to expand the scope of the investment that the State Parties intended to protect merely because

66 See Fedax v. Venezuela ICSID Case No. ARB/96/3, July II, 1997, Abaclat and others v The Argentine Republic, ICSID Case No. Arb/07/5, Decision on Jurisdiction and Admissibility, 4 July 2011. 67 par. 245. 68 69 70 see F. Montanaro, Case Comment Poštová Banka SA and Istrokapital SE Hellenic Republic. Sovereign Bonds and the Puzzling Definition of “Investment” in International Investment Law, ICSID Review, Vol. 30, No. 3 (2015), p. 551. 71 para 277.

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the list of protected investments in the Treaty is not a closed list. 72 The rule of interpretation of article 31 (1) requires that the terms of the Treaty be interpreted in good faith, and not only referring to the text, but to the context, as well as considering the object and purpose of the Treaty.73 In other words, the principle of good faith under article 31 (10 of the VCLT encapsulates the principle of effectiveness (“effet utile” principle).74 According to the Tribunal, the State parties to the treaty wanted an ample definition of what could constitute an investment, but within certain categories that are also broad, but not unlimited. Otherwise, the examples could be expanded to include any asset whatsoever, and would become useless or meaningless (par. 314).

With this as a starting point the Tribunal noted that several Treaties contain similar or even identical concepts of “investment” with the Greek-Slovakia BIT in the chapeau of the article that refers to protected investments, containing phrases such as “every kind of assets and more particularly though not exclusively..”, however the list of catalogue that follows the introductory phrase and that illustrates what may constitute and investment varies in some cases substantially from one Treaty to another.75 The Tribunal supported this approach by referring to several arbitral awards concerning sovereign debt securities. Interestingly enough, these tribunals reached the opposite conclusion and affirmed jurisdiction.76 Special emphasis was given to the Abαclat decision, and the Tribunal stated that the wording in the Slovakia-Greek BIT is different from the wording in Italy-Argenina BIT, from which the Abaclat tribunal derived its conclusions on the admissibility and jurisdiction, and specifically that the Slovakia-Greek BIT does not contain any reference to “obligations” or to “public titles”. According to the Tribunal the only reference to bonds in the Slovakia-Greece BIT is in Article 1 (1) (b) which refers to “shares in and stock and debentures of a company and any other form of participation in a company” (par.333). The Tribunal agrees with the Respondent that sovereign bonds are different forms of participation in corporations and therefore their exclusion from the definition of investment in a given Treaty indicates that the contracting parties did not intend to cover these types of assets (par.333).

Besides, according to the Tribunal “loans” referred to in 1 (1) (c) of the Greek-Slovakia BIT are different from “bonds”; creditors in loans are usually banks or a syndicate of banks whereas bonds are generally held by a large group or creditors, generally anonymous. Moreover bonds are easily tradable whereas tradability of loans or syndicated loans is generally limited. The tribunal agrees with the Respondent’s assertion that loans involve contractual privity between lender and debtor while bonds do not. The lender has a direct relationship with the debtor-in case of public debt, the State, as party to the loan agreement, while in the issuance of bonds the contractual relationship of the State is with its intermediary. The holders of bonds have contractual relationship with the intermediary of the clearing house where the bonds are acquired or both.77On the other hand, holders of bonds have contractual relationship with their intermediary or clearing house (par.337-9).

Finally, concerning the term “claims to money”, referred to in article 1 (1) (c) of the Greek-Slovakia BIT, according to the Tribunal should not be considered that this term includes bonds or other securities issued by a State. The wording of the Greek-Slovakia BIT refers to “claims to money or to any performance under contract having a financial value” . According to the Tribunal the correct interpretation should be that the claim to money must arise under a contractual relationship ( par. 343). The Tribunal interprets the provisions of Law 2198/1994 concerning the setting up and operation of the dematerialized system for the clearing and settlement of securities transactions over Greek sovereign bonds, the “System for Monitoring Transactions in Book-entry Securities” administered by the Bank of Greece and comes to the conclusion that “there is no contractual relationship between the State and Poštová Banka.” The latter had certain rights against the Greek Government under the terms of the GGBs, but such rights would only become exercisable against Respondent in one specific circumstance: the Greek Government’s failure to pay due interest and principal on securities to the BoG (par. 345). Even if, as suggested by Claimants, the issuance of the GGBs and the sales in the secondary market constitute one single economic operation, the Tribunal is not convinced that even the fact of considering such unified operation would result in the claimant having a “claim

72 para 288. 73 Para 288. 74Para 293. See also Montanaro ibid p. 552. 75 Para 290-1. 76 Montanaro ibid p. 552. 77 Para 338.

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to money” against Greece. Therefore, it does not have an investment for purposes of Article 1 (1) of the BIT (par. 348-9). Hence, the Tribunal distanced itself from previous case law on Argentine debt restructuring, thereby espousing the views of the dissenting arbitrators in Abaclat and Ambiente Ufficio.78

Because of the abovementioned conclusion of the Tribunal, it was unnecessary to examine whether Poštová banka’s interests in GGBs qualify as “investments” under article 25 of the ICSID Convention. However, since the Parties to the dispute devoted significant attention to the issue, the Tribunal felt it appropriate to make an assessment. The Tribunal analyses the “objective” and “subjective” tests, analysed above, and concludes, by majority, that even if the objective test were to be applied, the GGBs held by Poštová Bank do not constitute an “investment” under article 25 of the BIT because they do not satisfy the “risk” and “contribution to the host’s states economy” requirements.79

Concerning the element of ‘contribution to the economy of the State” the arbitral tribunal observes that only those payments destined for a “productive activity” could be considered as investments, whereas sovereign bonds that are issued for general budgetary purposes do not constitute “contribution to an economic venture”.80 In relation to the element of risk, the Tribunal is of the opinion that the risk of non-performance of the debtor is a purely contractual risk and only ‘operational risk’ (or “investment risk’), which has the meaning of insecurity concerning the profits of his economic venture is relevant for the determination of the word investment under article 25 of the ICSID.

D. Commentary

1. Restrictive interpretation of the the term “investment” under article 1 (1) of the

Greek-Slovakia BIT

Contrary to previous case law of the ICSID arbitration tribunals and to the express

wording of the definition of “investment” under article 1 1(c) of the Greek-Slovakia BIT, which objectively adopts a broad definition of the term investment, the Arbitration Tribunal interpreted restrictively the assets contained in the list especially the terms “loans” and “monetary claims” (article 1 (1) c), invalidating thus the expression contained in the first paragraph of the definition “indicatively and not restrictively”, which is clear and unambiguous and suggests that the term embraces everything of economic value, if it can be considered an “asset”. 81

Concerning the comparison between “loans” and “bonds” made by the Tribunal, it has to be noted, that, from an economic perspective, both are instruments for raising public financing by the State. “Investors” in case of bonds and “creditors” in case of loans provide funds to the State and receive interest payments at regular intervals whereas capital is reimbursed at the expiry of the loan and bond loan respectively. Both instruments contribute to the economy of the State which may use the borrowed funds for a variety of purposes, such as for infrastructure expenditures, economic and industrial development, to cover expenditures and for other financing needs of the State. From a technical perspective, indeed there are some differences between “loans” and “bonds”, the main one being that a bond is highly tradable in primary and secondary markets whereas tradability of loans is more limited, even though in modern capital markets even loans can be traded widely by using derivative instruments or the technique of securitization. Also, the terms of the bonds are more standardized and not easily amended, especially if CACs are not included in the bond terms. On the other hand, in case of a loan -which is usually undertaken by a Syndicate of Banks in case the borrower is the State - the loan agreement stipulates the conditions which must be fulfilled prior to disbursement of the loan as well as the conditions which must be fulfilled. In case of default or imminent default of the borrower, the lender can choose to delay declaring it until the borrower has cured it. From a legal perspective a bond loan agreement is a loan divided into securities (bonds), which evidence the promise of the issuer to pay to the bondholder (investor-buyer) the initial borrowed sum (bond principal) in addition to interest (coupon) paid at regular specified time intervals

78 Abaclat and Others v. Argentine Republic, ICSID CaseNo ARB/07/05, Dissenting Opinion (28 October 2011) paras 69-72; Ambiente Ufficion SpA and others v. Argentine Republic, ICSID Case No ARB/08/9, Dissenting Opinion (2 May 2013) paras 152-5. See also Montanaro ibid p. 553. 79 Paras 360-1. 80 Para 111. 81 UNCTAD, International Investment Agreement. Key Issues Vol. I, 2004, p .119.

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(mature dates). Indeed, in Fedax, the arbitral tribunal accepted that promissory notes are evidence of a loan and, thus, their purchase qualifies as an “investment” according to article 25 of the Convention. Given the similarities of loans and bonds, a more flexible teleological interpretation would have led the tribunal to conclude that Article 1(1) (c) of the Greece-Slovakia BIT also covered sovereign bonds.

In addition, the argument of the Tribunal that in article 1 (b) of the BIT there is a reference to “corporate bonds” whereas in article 1 (c) no reference to “bonds” or “securities” is made whatsoever and for this reason the Tribunal assumes that the parties wanted to exclude government bonds, is not persuasive. One would wonder why for instance to protect investors of bonds issued by a corporation which are guaranteed by the Greek State and not to protect also bondholders of Greek government debt? In particular, by reference to the case in question, the holders of bonds issued by the transport company in Greece (“OASA S.A.”) and guaranteed by the Greek State – which have been exchanged under the PSI procedure - would be protected by article 1 (c) of the BIT whereas the bondholder of government bonds, according to the interpretation given by the Tribunal won’t receive any protection, based on the abovementioned interpretation. It is evident that there is no reason to make such a differentiation concerning the level of bondholder protection.

Furthermore, bonds and especially dematerialized bonds fall within the definition of “claims to money”, contrary to what the arbitral tribunal concludes. The legal nature of the issuance of debt securities in paper form (i.e. bonds, promissory notes etc.) - or the causa for their issuance - is the loan entered into between the issuer and the first holder(s) of the debt securities.82 A core element of bonds in paper form is the undertaking of the obligation of the issuer towards the holder to pay interest at regular intervals and to reimburse capital at the expiry of the bonds; the bondholder, indeed, has a ‘claim to money’ against the issuer. In other words, a ‘claim’ and an ‘obligation’ are the two facts of the same coin: the contractual relationship between the debtor and the creditor.

Dematerialisation of bonds has not altered the legal principle concerning the abovementioned pecuniary rights a bondholder has against the issuer deriving from the securities.83 In other words, rights attached to dematerialized securities have the same legal nature as the rights attached to the securities issued in paper form and, as far as Greek municipal law is concerned, are governed exclusively by the rules of private law (i.e. corporate law in relation to shares, law of obligations in relation to bonds).84 Hence, a bondholder has a monetary claim against the issuer to ask for payment of interest and reimbursement of capital at the expiry date of the bond loan agreement.

Concerning the rights of the investor over the securities account two approaches have been supported in Greek literature. Under the first approach it is possible to characterize the rights of the investor as property rights over the securities account, since it is possible to apply by way of analogy the provisions of property law relating to “ownership” and “possession”. Under the second approach-the ‘contractual theory”- the investor has merely sui generis rights over the securities account, without totally excluding the application of some of the provisions or property law (relating to “things”). The transferor of dematerialized securities does not transfer “ownership” over the securities accounts but instead assigns the particular contractual relationship incorporated in the securities account.85 Transfers are characterized as “assignments” of contractual claims, with the differentiation that the assignor does not have to give notice to the debtor - in this case the Greek State as issuer (article 460 of the G.C.C. and Art. 6 para. 2 of Law 2198/1994). The characterization of the rights of the investor over his securities account is important, mainly because it affects the position of the holder in case of the insolvency of its intermediary; if the investor has property rights over the securities account he may exercise his right of possession over the securities whereas if the investor’s rights over the securities account are simply contractual, then the investor has the same position as an ordinary creditor.

2. The provisions of Law 2198/1994 have not altered the underlying contractual

relationship between the issuer and the bondholder

82 See indicatively Rokas, The Law of Companies, 2008 p. 400. 83 see Tsibanoulis, Dematerialised securities at the border line between property law and contract law, Review of Commercial Law, 2009, p.360 , 84 Markou, Dematerialised securities as “sui generis” rights, Hellenic Justice 2009, p.354. 85 Markou, Dematerialised securities … ibid,p. 350.

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The arbitral award concludes that there is no contractual relationship between the investor and the issuer, under the provisions of Law 2198/1994. It has to be noted that the majority opinion of the Council of State also reached a similar conclusion, in its decisions 1116 and 1117/2014, stating, inter alia, that the passing of the Greek Bondholder Act did not impair the procedural rights of the investors under Law 2198/1994 which provides that the investor has a direct claim against the issuer in case the latter is in default to pay interest and principal on the bonds. Hence, according to the majority opinion of the Council of State, there was no obligation of the State to invite directly the end-investors to vote for the restructuring and, subsequently no infringement of the right to economic freedom enshrined by article 5 of the Greek Constitution. The correctness of the decisions of the ICSID tribunal and of the majority of the Council of State may be challenged having taken into account the principle mentioned above that dematerialsation of bonds does not have altered the underlying rights of the bondholder against the issuer and also that the provisions of Law 2198/1994 aim to facilitate securities settlement of transactions on Greek government bonds and to modernize the Greek holding system of dematerialized securities and not to impair the rights of the bondholder against the issuer.

In particular, Law 2198/1994 provides for the optional dematerialisation of government securities and securities issued by public law legal entities and establishes the System for clearing and settling transactions on Greek government securities and securities guaranteed by the State, operated by the Bank of Greece. The said law provides that the State may borrow funds without the issuance of negotiable instruments in paper form (bonds, promissory notes e.t.c.) by natural and legal persons and credit institutions, which have the capacity to enter into such transactions (article 5 par.1 of the Law). The Minister of Finance is authorized accordingly by Law to enter into loans for the account of the State and to determine the terms of the loans (article 5 par.2 subpar. 1). The System monitors the loans entered into by the State and the titles to which each loan is divided, by way of book-entries. Coupons on the titles are also monitored by book-entries if traded separately. The Bank of Greece (“BoG”) is the administrator of the System and operates the book-entries concerning termination, payments and reimbursement of the loans for the account of the Greek State (article 5 par.2 subpar. 2)). It also acts as the “treasurer and fiscal agent” of the State (article 2 par.1 of the Statute of the BoG).

The System also serves as a register of book-entry securities issued by the Greek government or other public law entities (Articles 5 and 11 of Law 2198/1994).The System, as most securities settlement systems in the capital markets, operates as an “indirect holding system”86 for government dematerialized securities which means that only the Participants are registered on the System and not the end-investors. This indirect holding system is organised at two levels: (a) each Participant holds two different accounts in the System, an “own portfolio account” and an “investor/customer portfolio account”, which latter is a single account pooling together all the securities of the Participant’s customers (“omnibus account”) (article 6 par.7), and (b) at the level of each Participant, separate accounts are kept within the investors’ accounts by category of securities with the same characteristics (article 6 par.5). It cannot be argued that the Participant has legal title over the “customers’ omnibus account” maintained at the System, since they are held on its customers’ name and on their behalf. Greek law does not recognize the institution of “trust”, hence, the Participant acts as agent of its customers.

In addition, in respect of investors’ securities held in the Participant’s “customer portfolio account” at the System, investors may raise a claim over the securities only against the Participant with whom they hold an account (article 8 para 2 of Law 2198/1994) and not against the System or the BoG, as administrator of the System. The obligations of the State to pay accrued interest and capital are discharged by paying BoG, which subsequently transfers the relevant amounts to the securities accounts of the Participants in the System and BoG is absolved of any responsibility against the Participants (article 8 par.6). To satisfy their claims to the securities against the Participant, investors are granted a privilege over all accounts of

86 See indicatively Hague Convention on Private International Law, The law applicable to dispositions of securities held through indirect Holding Systems, 2000; Francisco J. Garcimartin Alferez, The UNIDROIT Project on Intermediated Securities: Direct and Indirect Holding Systems (2006), p. 3, European Financial Markets Lawyer Group; G.P. Kouretas - Ch. Tarnanidou, Shareholding in EU: Is “indirect holding” approach appropriate in achieving financial integration? International Conference “Improving Financial Institutions: the proper balance between regulation and governance”, Helsinki (Apr. 2012).

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the Participant held in the System. Thus, if the “investor/customer portfolio account” of the Participant is not sufficient, investors’ claims to the securities are, by virtue of a legal privilege, satisfied on the Participant’s “own portfolio account”, including also securities of the Participant held in the “investor/customer portfolio account” of another Participant (article 8 par.3).

As an exception to the rule that the investor only has rights over the securities against the Participant, it is expressly provided that in the event that the Greek State or other Greek public entities, issuing securities held within the System, fail to fulfill their obligations (namely they do not timely pay interest or capital due under the securities to the BoG for remittance to the Participants in the System), investors are entitled to raise a claim, in respect of their rights attached to the securities, against the issuer (Greek State or Greek public entities) and not against the Participant or the BoG (article 8 par.2). The Participant is obliged to give to investors documents certifying their rights as investors of the bonds. In addition, it is provided that (banking) secrecy concerning rights in book-entry government securities is lifted towards the issuer-Greek State (article 12 par.2 of the Law).

The fact that the bondholder can only exercise his contractual claim (which arises from the bond loan agreement between the issuer and the initial bondholders) against the issuer in case of the latter’s insolvency (article 6 of Law 2198/94) does not alter the fact that he does indeed have a contractual right against the issuer acquired when securities are credited to his securities account, i.e. when he becomes the “owner” of the securities. Hence, if his rights as bondholder are breached, for instance, by not recognizing the right to vote for an amendment of the bond-terms that would lead to the diminution of his contractual claims against the issuer, as has happened with the Greek Bondholder Act, he may challenge the validity of the said provisions before an arbitral tribunal or a court, depending on the terms of the bond loan agreement.

In this respect the dissenting opinion of the Council of State supports the correct approach.The dissenting opinion notes, firstly, that there has been an infringement of the procedural rights of the investors since the essential content of the bond – as an instrument of finance and as a security even in dematerialized form – is the relevant contractual obligation, i.e. the obligation of the issuer (and the relevant claim of the bondholder) to pay coupons at regular intervals and also the nominal amount of capital at the expiry of the bond. This fundamental conceptual element of the bond relationship is not extinguished: a) by the legal capacity to transfer the bond until its maturity, b) by the provisions of Law 2198/94 which provide, inter alia, that the investor has a direct claim against the issuer in case of non-repayment of the bonds, c) by the rights to proceed to legal measures by the investor against the Participant (for instance in case of the latter’s default), or d) by the fact that the market value of the bond may fluctuate until its maturity date.87In addition, the decision of the restructuring of the Greek sovereign debt constitutes de facto an assumption of the failure of repayment of the initial Greek bonds, activating, thus, the implementation of article 8 par.2 of Law 2198/1994. Finally, the dissenting councillors reasoned that the interference with the rights of the applicants took place at a time quite distant to their issuance (Council of State 1909/1910/2001 Plenary), hence, there is infringement of the legitimate expectations principle, as well as of the right to economic freedom, protected by the Greek Constitution.

III. Conclusions The recent arbitral award in Postova Banka interprets restrictively the broad-asset

based definition of ‘investment’ contained in the Greek-Slovakia BIT, which is also adopted by the majority of the BITs Greece has entered into with other countries. It has to be noted that even if the Tribunal reached the conclusion that dematerialized bonds fall within the ‘investment’ definition of the BIT, it would have rejected jurisdiction, since it concludes that the purchase of Greek sovereign bonds by the claimant do not fulfill the requirements of ‘risk’ and ‘contribution to an economic venture’ required by the objective test to interpret the word ‘investment’ in article 25 of the ICSID. The tribunal justified its departure from the Abaclat case because the Italian-Argentina BIT explicitly referred to “obligations” and “titles”. The term “claim to money”, though, mentioned in the Greek-Slovakia BIT and “obligation” are the two sides of the same coin. ++ ABACLAT SUBJECTIVE APPROACH?

In addition, the award highlights the interaction between international investment law and municipal law. The role of municipal law is to determine whether there is an underlying right in an economic activity that may be considered as an ‘investment’, according to the will of

87 Decision 1116/2014 par. 29.

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the parties as expressed in a given BIT. The Tribunal makes a short analysis of the relevant provisions of Greek Law (Law 2497/1996) and reached the conclusion that there is no underlying right for the investors of Greek sovereign bonds, because of the lack of privity of contract. However, according to the legal doctrine under Greek law the rights deriving from dematerialized bonds have not been altered because of the elimination of paper; securities accounts have replaced the negotiable instruments but the contractual monetary claim of the bondholder against the issuer has not been extinguished or impaired by the implementation of specific legislation (in this case by Law 2198/1994) to deal with the challenges of a dematerialized environment. It remains to be seen whether this award shall set a persuasive precedent for other cases to be heard before ICSID Tribunals dealing specifically with the Greek debt crisis and with sovereign debt restructuring in general, favoring thus the States at the preliminary jurisdictional stage.