Business implications of Greece leaving the Euro
At last our politicians
are admitting the possibility of a Greek exit, and the need to plan for it. But
what are the implications for businesses trading with Greece, or with assets
there? Here’s one lawyer’s view.
A Greek exit
would take one of two forms: a unilateral decision by Greece, or a managed
process agreed by the whole EU, or at least the Eurozone. An exit means
breaches of the EU treaties, so we are talking about political decisions rather
than legal mechanisms. Anything done without formal agreement by all EU member
states would be illegal, but that doesn’t mean it can’t and won’t happen –
international law doesn’t work like that. Once a Greek exit has been announced,
all involved will be under enormous pressure to reach agreements to mitigate
the damage, so a unilateral exit could turn into a managed process, perhaps
ending with a retrospective treaty. Although a Greek default and exit would be
greeted with initial hostility, governments may actually help the Greek
government in order to preserve stability in the rest of the Eurozone.
Businesses and individuals in other parts of Europe cannot assume that they
will be protected by their own legal systems.
Cash
All Euro
notes and coins circulating in Greece would (theoretically) be converted into
new Drachma at an official exchange rate, making them far less valuable than
other Euros. It’s unlikely that the distinction would be made by the country-specific
designs of the Euro coins, or the “Y” prefix of the serial number on Euro notes.
Notes within Greece would probably be overprinted with a Drachma designation,
and banks would close until they could start issuing the Drachma notes. Of
course it will be in Greek citizens’ interests to avoid the overprinting and to
take their Euro notes abroad, and we can expect border controls and massive
currency smuggling. Eurozone governments may want to co-operate in stemming
this, as contraband Euros will undermine good German ones, so European governments
could introduce bans on possessing or exchanging Euros known to have been
smuggled from Greece, and could seize the currency – though not once it was
circulating in their own countries.
Bank Deposits
All Euro
deposits in Greek banks in Greece will be converted into devalued Drachma, assuming
that the banks themselves survive. Even foreign depositors are unlikely to have
any legal remedy. Local deposits in foreign banks are likely to be governed by
Greek law. Deposits in foreign branches of Greek banks in Euros are probably
repayable in Euros. Greek depositors will be rushing to get their deposits abroad,
and ideally outside the Eurozone, or to invest them in other currencies such as
dollars or sterling. It is possible that the EU, or the Eurozone, would attempt
to help Greece by converting Euro deposits in European banks held by Greek citizens
or residents into Drachma; that would be controversial and administratively
very difficult, especially for small consumer deposits. Greek law may compel
its citizens to repatriate their assets, though Greeks may not hurry to comply.
Debts and payment obligations
The whole
network of business relationships would be thrown into chaos, with losses
falling almost randomly on someone in the supply chain. Euro-designated debts
in Greece covered by Greek law would be redenominated into Drachma and could be
settled in devalued Drachma. It is likely that Greek citizens or residents would
be protected by Greek law against being sued for Euro debts, so even if your
contract is governed by English law, you are likely to have difficulty
enforcing a Euro judgment in Greece. If the debtor has assets outside Greece,
you may be on stronger ground.
All
international contracts should include a choice of law and jurisdiction. If you
supplied a customer in Greece for a price in Euros under an English law
contract, how will you fare? UK jurisdiction is specified, and the court will
allow the claim to be served outside the UK – though you might be in difficulty
if the customer was a consumer. English courts can give judgments in foreign
currency, but will they award Euros or Drachma?
Lex monetae says that where a contract
refers to a currency, there is an implied choice of that country’s law to decide
what constitutes the currency and payment. It is unlikely that this would apply
if Greece seceded and the Euro continued, but it could apply if the Euro broke up,
or more likely if the whole Eurozone passed legislation saying which debts were
redenominated. That could itself be controversial, as non-Eurozone member
states (such as the UK) might block EU legislation that prejudiced UK creditors;
the European Court would probably contort itself to protect the Eurozone.
Otherwise,
payment obligations will be governed by the chosen law of the contract. English
law is likely to say that a Euro obligation must be paid in Euros. The English
court’s judgment could then be enforced against the debtor’s assets in the rest
of Europe (other than Greece) or (with more difficulty) in many other places
You may need
to take care not to acquiesce in the conversion of your debt into Drachma, for
instance by accepting the Drachma payment and then attempting to claim the rest
of the Euro amount. The actual terms of your contact may be important – if it
defines “Euro” as the currency of Greece, you may be in trouble. Any place
specified for payment may also be important. If making contracts now, be
specific about these things.
Other contractual obligations
Failure to
pay in the contractual currency on time will often be an event of default, which
may entitle the other party to bring the contract to an end and claim damages –
though notice may be needed if time is not “of the essence.”
The
imposition of exchange controls could make some contracts legally impossible to
perform, in which case they could be frustrated – in which case neither party
has a claim against the other, and any loss lies where it falls. Grexit could
also trigger “material adverse change”
or “force majeure” clauses in some
contracts. Otherwise, the contract is likely to continue (in the absence of an
insolvency) with the consequences being decided by the courts. If you are about
to ship goods, uncertain as to whether you will be paid in Euros or Drachma, you
have a difficult decision to make: don’t ship, and risk being sued; or ship the
goods, and risk not being paid.
Breaches of
exchange control may be criminal offences, in Greece or in other EU states. If
it became illegal under English law, or possibly under other laws, to perform
your contract, you will not be obliged to carry on. There may be other legal
changes in Greece or elsewhere, which could be quite oppressive, such as
restrictions on the movement of assets or people. Foreign governments could
pass legislation imposing sanctions on Greece, or attempting to protect their
citizens and companies from the worst effects of Greek default. They might
enforce mutuality, saying that if Greece is only paying its debts in Drachma, debts
owed to Greek parties may also be settled in Drachma.
Guarantees
and securities for Greek Euro debts have to be interpreted according to the
relevant law, but are likely to follow the main payment obligation: so an
English law guarantee of a Greek Euro debt would usually guarantee whatever the
payment obligation was under the main contract. Contracts or mortgages relating
to land in Greece are likely to be governed by Greek law.
Insolvency and State immunity
Many Greek commercial
companies are likely to go bust. Europe-wide recognition of insolvency proceedings
probably means that their UK assets will be protected from seizure, so that
they are distributed to creditors in an orderly fashion. There is no insolvency
law for nations, so enforcing government debts and seizing assets will be a
free-for-all. UK creditors may have a head start, as many Greek government and
bank financial assets are likely to be located in London.
Foreign
governments are protected against being sued, but sovereign immunity does not apply
to commercial transactions, including State borrowing.
When Argentina defaulted on its sovereign debt, there were many examples of
bondholders successfully suing in foreign courts and enforcing against foreign
assets. Sovereign immunity would protect the Greek government from claims for
damages, for instance to recover losses flowing from its breach of the EU
treaties.
What if I’m the debtor?
If you owe
money in Euros, you may want to try paying in Drachma. If your contract is
closely connected with Greece, you may get away with it. The arguments above
apply in reverse, but Greek law may make it more difficult for Greek companies
to claim settlement of their bills in unreconstructed Euros.
What should I do now?
Many people
will be pulling money and assets out of Greece. If trading there, get paid in
advance. Remember that any letter of credit or performance bond may only be as
good as the underlying obligation, when it comes to currency. If you have a
gambler’s mentality and still want to extend credit to Greek parties, make sure
your contract is under English law and jurisdiction. If you must make Euros the
payment currency, make it clear that you are talking about the European
currency and not the Greek one – or perhaps specify the currency of Germany!
Include an indemnity by the other party requiring them to compensate you against
any loss flowing from their country leaving the Euro, including exchange losses
and payment delays. Review what would happen if the other party, or his
associates and subcontractors, disappeared in a maelstrom of insolvency and
cross-default following Grexit. Make a redesignation of the currency an event
of default. And while you’re changing your terms of business, what about
Portugal, Ireland, Spain, Italy?
If you’re a
bank, launch an advertising campaign in Athens – seeking deposits in nice, safe
sterling in an account in London.
