Bondholders Will Sue Every Sovereign

[interestrateripoff]

http://ftalphaville.ft.com/blog/2010/11/26/417316/bondholders-will-sue-every-sovereign/

A timely paper from the International Capital Markets Association has just hit our inbox.

The title: “ICMA SOVEREIGN BOND CONSULTATION.”

It might sound dry, but you can readily guess the reasons for it.

For instance, while there’s lots of talk about transparency in the document, there’s also a lot about jurisdiction and Collective Action Clauses (CACs) — both of which are likely to become important in any eurozone debt restructuring.

First on those CACs:

Collective Action

Aggregated voting can contribute to more orderly and expeditious debt restructuring because it reduces the risk that a group of hold-out investors can take control of an individual bond issue and vote against a restructuring of that bond, even though the restructuring may be acceptable to a qualified majority of holders of all other bonds. It is contemplated that such a bond amendment could be made with an 85 per cent majority. We would welcome views on: whether creditors should be willing to accept the idea of aggregation of their voting rights with the holders of other bonds that are also subject to a vote; and whether 85 per cent is the appropriate percentage majority for bond amendments of this kind. In addition, we would welcome views on whether aggregation should also be used to accelerate payment or reverse an existing acceleration.

And going back to the jurisdiction point, as the ICMA itself notes in the paper, this has never really been much of an issue before. With the start of the euro, in particular, the distinction between the bonds of different eurozone members sort of fell away.

Indeed, there’s a suggestion by ICMA that there are still plenty of investors and traders out there who have no idea which jurisdiction actually governs their bonds.

....

No surprise then, that Icma is recommending the following:

Governing law and jurisdiction

The Concept relating to governing law contemplates that the chosen legal system must provide effectively for the submission of the sovereign issuer to its courts (that is, the ability to waive immunity from jurisdiction) and for the enforcement of any judgement that may be awarded by such courts against the assets of the Issuer. As these matters are usually qualified, even in jurisdictions whose law provides the most liberal waiver provisions, the Concept does not require absolute waiver of jurisdiction and agreement to execution, but permits qualifications, provided these are set out in legal opinions that will be provided to the Managers prior to the signing of the Subscription Agreement. The Concept also provides for disclosure, where the chosen legal system is that of the Issuer itself. We would welcome views on: how this proposal would be received by governments that currently enjoy the highest credit status; and whether an alternative would be to say that the governing law should be one customarily chosen to govern bonds issued in the international capital markets.

Did you catch that?

Bondmarket association says bondholders should be able to sue sovereigns and have recourse to their assets. Not surprising in any way — but indicative of how debt investors (especially senior ones) intend to deal with this burden sharing concept.

Excellent news for everyone.

We can all become slaves of the bond holders....

Thank god our pensions are all linked into govt bonds. Christ that would get messy.....

[leicestersq]

http://ftalphaville.ft.com/blog/2010/11/26/417316/bondholders-will-sue-every-sovereign/

Excellent news for everyone.

We can all become slaves of the bond holders....

Thank god our pensions are all linked into govt bonds. Christ that would get messy.....

Well it is only a consultation.

I dont know what bondholders can do really. Any legal action is at the forbearance of the country issuing the debt. If they dont want to pay you, they normally have a few tanks to back up their position.

I guess that the law should be used to make sure that each bondholder is treated equally. However, I do believe that it is up to the issuer to decide how to give the borrower a haircut. When making that decision, they have to be aware that the more severe the haircut, the more it will cost to borrow money in the future.

[shindigger]

Well it is only a consultation.

I dont know what bondholders can do really. Any legal action is at the forbearance of the country issuing the debt. If they dont want to pay you, they normally have a few tanks to back up their position.

I guess that the law should be used to make sure that each bondholder is treated equally. However, I do believe that it is up to the issuer to decide how to give the borrower a haircut. When making that decision, they have to be aware that the more severe the haircut, the more it will cost to borrow money in the future.

Squeam and squeam and squeam by the looks of it.

[The Masked Tulip]

I think this will be the response of countries.

[copydude]

Bondmarket association says bondholders should be able to sue sovereigns and have recourse to their assets.

Guess we're lucky all the assets have already been sold off.

And Vera Lynn would never let them take Dover.

[Rachman]

Why shouldn't the bondholders be able to sue ? They will of course have to jurisdiction shop so it can't be as bent as the Railtrack court case over here. Whether they win or not is different - but you simply can't allow expropriation or seizing of assets or absolution from state liability. If the bondholders sue and win, the State is in default - if the bondholders negotiate a haircut, then so be it. But it cannot be right that the States are unilaterally able to get rid of their liabilities.

As for the States telling the bond markets to eff off. Well, they need to borrow off someone - they are not self-funding - so if they tell the markets to eff off, who is going to stump - a central bank or entity that can just print currency without it even being backed by some form of action ...... they can't do that indefinitely, whatever they think. There aren't the funds or the inclination to bail out all of the crap countries - Ireland may actually have had a result, provided they aren't so damned pigheaded as to refuse to pass their budget (which, being Irish, they could easily be that difficult), because those at the back end of this will find much less support than those in earlier....

[madpenguin]

Well it is only a consultation.

I dont know what bondholders can do really. Any legal action is at the forbearance of the country issuing the debt. If they dont want to pay you, they normally have a few tanks to back up their position.

Indeed, can just hear the "lawful jugdgement" of "Go away, or you'll regret it", accompanied by the sound of assault rifles being taken off "safety"

[Rachman]

Indeed, can just hear the "lawful jugdgement" of "Go away, or you'll regret it", accompanied by the sound of assault rifles being taken off "safety"

you don't actually believe that, do you ? If they sue and win, then it won't be direct enforcement - it will be slowly cutting off finance to those states until they pay up - a denial of credit, a refusal to roll over debt there, insisting on cash collateralisation for money flows, closing bank accounts and money flow routes, withdrawal of assistance in aid and administration schemes - leaning on their advisors to stop acting for the State, leaving the States with nothing. Not even the money to maintain, let alone buy more of those guns...... how will a State do business without letters of credit - the State has already been proved to be untrustworthy - Chinese and Russian weapons will require cash and not in that currency either......

[Tired of Waiting]

...who are very good mates with the bankers who are very good mates with the guys at teh pension funds who vote their pay rises through.

win win.

Exactly.

We have never had modern corporate governance in Britain, adequate to modern shareholders' capitalism. The "old boys' network" used to take care of corporate governance, watching their own money (for their own good, of course). But that structure is obsolete now. And it was a major cause of the bubble. A very fundamental piece of regulation (legislation?) to watch will be Vince Cable's reform of British Corporate Governance. He wants to do a good job, but I suspect he will need a lot of political support. If the left were clued up, they would help him. UK workers pensions will depend on it.

[leicestersq]

Why shouldn't the bondholders be able to sue ? They will of course have to jurisdiction shop so it can't be as bent as the Railtrack court case over here. Whether they win or not is different - but you simply can't allow expropriation or seizing of assets or absolution from state liability. If the bondholders sue and win, the State is in default - if the bondholders negotiate a haircut, then so be it. But it cannot be right that the States are unilaterally able to get rid of their liabilities.

As for the States telling the bond markets to eff off. Well, they need to borrow off someone - they are not self-funding - so if they tell the markets to eff off, who is going to stump - a central bank or entity that can just print currency without it even being backed by some form of action ...... they can't do that indefinitely, whatever they think. There aren't the funds or the inclination to bail out all of the crap countries - Ireland may actually have had a result, provided they aren't so damned pigheaded as to refuse to pass their budget (which, being Irish, they could easily be that difficult), because those at the back end of this will find much less support than those in earlier....

Yes you can. It may not be nice, but states must always have the option.

How often do states sign contracts where the taxpayers who have to pay that liability, dont even realise what is going on? Fraud via the government is rife, and when someone honest gets to take the reigns (happens occasionally), they have to do what is necessary, And that can mean reneging on debts.

This is just a risk you run when you lend to the state.

We are going to get the same problem in the UK too soon. We have massive pension liabilities, that are to be paid by our young and those yet to be born, and yet they did not agree to pay them. Their inherited debts will be so massive, that they cannot pay them either. My guess is that they wont pay them. That means reneging on stupid promises that have been made by this and previous governments. So be it.

[madpenguin]

you don't actually believe that, do you ? If they sue and win, then it won't be direct enforcement - it will be slowly cutting off finance to those states until they pay up - a denial of credit, a refusal to roll over debt there, insisting on cash collateralisation for money flows, closing bank accounts and money flow routes, withdrawal of assistance in aid and administration schemes - leaning on their advisors to stop acting for the State, leaving the States with nothing. Not even the money to maintain, let alone buy more of those guns...... how will a State do business without letters of credit - the State has already been proved to be untrustworthy - Chinese and Russian weapons will require cash and not in that currency either......

The emoticon at the end of that post should give you some indication of the light in which it was intended, come on it is Friday do we have to be this miserable all the time?, of course things will go a lot different in reality, however if this becomes widespread i.e. nearly every country affected then the "eff off" option may conceivably come into play

[leicestersq]

you don't actually believe that, do you ? If they sue and win, then it won't be direct enforcement - it will be slowly cutting off finance to those states until they pay up - a denial of credit, a refusal to roll over debt there, insisting on cash collateralisation for money flows, closing bank accounts and money flow routes, withdrawal of assistance in aid and administration schemes - leaning on their advisors to stop acting for the State, leaving the States with nothing. Not even the money to maintain, let alone buy more of those guns...... how will a State do business without letters of credit - the State has already been proved to be untrustworthy - Chinese and Russian weapons will require cash and not in that currency either......

The only point of a court I can see is to ensure you get a fair amount in relation to others with a haircut. As you clearly point out, the power of the bondholders is to deny further credits to the state, who then has to pay for all of their obligations with hard currency. This can be their own issued currency of course, which can still be widely accepted in the case of a state default, just so long as you dont print too much of it. And all of that means balancing the budget for many years.

And I challenge anyone to describe how the UK could balance its budget without taking an axe to its pension liabilities.

[Rachman]

The emoticon at the end of that post should give you some indication of the light in which it was intended, come on it is Friday do we have to be this miserable all the time?, of course things will go a lot different in reality, however if this becomes widespread i.e. nearly every country affected then the "eff off" option may conceivably come into play

in that case, I know this Greek Bloke, Nick, he can get us some artillery - we can make a killing and win back the borrowed wedge we lost in a corrupt gambling match anyway.... then we can buy those old people some new furniture.......

Edited November 26, 2010 by Rachman

[madpenguin]

in that case, I know this Greek Bloke, Nick, he can get us some artillery - we can make a killing and win back the borrowed wedge we lost in a corrupt gambling match anyway.... then we can buy those old people some new furniture.......

Thats more like it!

Actually thinking about this if it got to the point where bond holders need to sue surely that countries a lost cause anyway, who else would buy bonds while legal action is going on?

I suspect this is being raised either to put the frighteners on Governments considering this or more likely what Leicestersq mentions, getting a bigger slice of what's left

[Rachman]

If you think of large scale litigation as like a nuclear bomb - if it goes off, there's nothing left for anyone, but it is a massive deterrent and a large stick to wield at people.

[madpenguin]

If you think of large scale litigation as like a nuclear bomb - if it goes off, there's nothing left for anyone, but it is a massive deterrent and a large stick to wield at people.

Yeah, problem is using that analogy I think we're already at Defcon 2

[Rachman]

Yeah, problem is using that analogy I think we're already at Defcon 2

I don't know about you, but metaphorically I am already in my financial bunker.... I will leave it to the scarab beetles and the mutants that survive the holocaust on the surface and will probably pop up again to seize things for myself when the radiation dies down......

[_w_]

you don't actually believe that, do you ? If they sue and win, then it won't be direct enforcement - it will be slowly cutting off finance to those states until they pay up - a denial of credit, a refusal to roll over debt there, insisting on cash collateralisation for money flows, closing bank accounts and money flow routes, withdrawal of assistance in aid and administration schemes - leaning on their advisors to stop acting for the State, leaving the States with nothing. Not even the money to maintain, let alone buy more of those guns...... how will a State do business without letters of credit - the State has already been proved to be untrustworthy - Chinese and Russian weapons will require cash and not in that currency either......

Well, there is nothing that says States should be liable for some of their corporations' (banks) debts is there? We can hope that our nations still have some sovereignty left to stop banks from making up the rules as they go along.

[Democorruptcy]

Courts uphold laws.

Governments could be pass a law before any court case to fix the outcome.

There is a chap here suggesting HNWI's aren't taxed enough - why just tax? Couldn't governments just confiscate their assets if they wanted?

Of course that depends on who is pulling the puppet politicians strings.

Credit Suisse is, as the name suggests, a Swiss bank, and therefore very interested indeed in the whereabouts of money. In October, its “research institute” issued a report on the world’s disposable cash. This put a figure on “global wealth”: $200 trillion. It also put a figure on “global government debt”: $45 trillion.

The report said there are, roughly speaking, 4.4 billion adults on the planet, but only about 10 million of those exist in a manner Credit Suisse would understand. These are ultra “high net worth individuals” (HNWIs). Between them, they can lay hands – have a calculator ready – on $39 million millions. Seriously.

Now, I don’t say anyone should want to eat the rich. As I have mentioned previously, they have no taste. Nor do I say, necessarily, that there are 10 million thieving swines among us. (Then again, what are the odds?) I merely remind you: $45 trillion in debts; $39 trillion known to be – and never mind the rest – in private hands. Have we really cracked this taxation thing?

Predictably, the largest number of HNWIs are in America, land of the free, where anyone can become rich, but few – for what sort of system would that be? – actually do. Some three million Americans have 31% of the £39 trillion, with the Japanese close behind. But Europe, continent of emigrating Irish folk, rioting Greeks and Britons who are “all in this together”, doesn’t do badly.

We also have around three million HNWIs. Their collective wealth is calculated at $9.5 trillion. Better still – for them, at least – that figure represented a 14.2% increase in 2009. Why so lucky? Because in 2009 the stock markets were roaring. They were roaring chiefly because of all the money pumped into “the system” by governments saving banks. Now those governments are a bit short and would like the rest of us to pay up, please. Which brings us back to taxation.

http://www.heraldscotland.com/comment/ian-bell/why-don-t-we-tax-the-rich-1.1069738

[leicestersq]

Courts uphold laws.

Governments could be pass a law before any court case to fix the outcome.

There is a chap here suggesting HNWI's aren't taxed enough - why just tax? Couldn't governments just confiscate their assets if they wanted?

Of course that depends on who is pulling the puppet politicians strings.

Courts uphold laws? - Only when it is in the interest of the judge to do so.

And I would like an explanation please of how a state can be made to pay what it doesnt have? If you try and tax people too much, they will rebel and overthrow the governments and the courts. Going to court is futile except for minor quibbles about equality of haircuts.

[Odysseus]

Has anyone any thoughts on how this will affect the CDS market?

Could this be the start of the great unwinding?

[copydude]

Governments could be pass a law before any court case to fix the outcome.

Couldn't governments just confiscate their assets if they wanted?

Good, out of the box thinking. (And now I understand why you are called Redhat. )

Our lily-livered Heads of State simply don't have the required expropriation skills.

We should pull in that Hugo Chavez guy as a confiscation consultant.

[Democorruptcy]

Courts uphold laws? - Only when it is in the interest of the judge to do so.

And I would like an explanation please of how a state can be made to pay what it doesnt have? If you try and tax people too much, they will rebel and overthrow the governments and the courts. Going to court is futile except for minor quibbles about equality of haircuts.

What??

If a state doesn't have enough it can just take it. Wasn't it just yesterday Hungary had decided to snaffle the pensions of their people and Ireland are allegedly looking at doing the same?

Why can't a state just pass a law to say that it is illegal for anyone to have more than say £5m - any surplus is confiscated? Do you think the majority of people wouldn't applaud that? The only problem is that the people holding most of the money also hold most of the politicians in their hip pockets.

I didn't say I wanted to tax people more. The author of the article was suggesting taxing HNWI's not me. I was merely using that article to show how few people hold most of the wealth.

[billybong]

=

1 ICMA’s primary objective is to support the creation of orderly and well-functioning

international capital markets....

Yeah right. Who's got the note

[stormymonday_2011]

I think most people misunderstand the article.

As I understand it the issue is whether in law any Eurozone country such as Germany could be held responsible for debts issued by another Eurozone country. The question is whether the supra national nature of the currency means that any EU state using it is part of a single sovereign entity. It is not about bondholders using the law to sue the likes of Ireland which would be pointless anyway as the country is essentially bankrupt so there is little to collect against.

With regard to states such as the UK such legal action is unlikely as UK soverieign debt holders are guaranteed payment. It is just the specie in which the debt is paid is likely to be a severely devalued currency (ie an implicit rather than explicit haircut), Bondholders have no defence against the latter course since it is the very essence of the market in which they operate that currency values change (ie forex risks of investing in bond denominated in floating currencies were known when they bought the bond). . In addition the UK government unlike its Irish counterpart has not guaranteed to pay bank bondholders via any foolish scheme such as NAMA. Its bailout of banks took the form of buying an equity stake in existing companies such as LLoyds or RBS. This means its liabilty is limited to its share stake (ie normally company liquidation rules would still apply).

It also needs to be remembered that the very 'law' which the bond holders would seek to use to enforce their rights explicitly flows from the sovereign entity itself . The concept h of law has little or no meaning or validity without it.

As far as enforcement goes bondholder are in a very weak position against sovereign states because though in essence they can refuse to trade with such entities and seek to foreclose on their assets in practise their is very little chance of them doing so as it would require the resources of another sovereign state to a materialise those rights. As most of Europe is probably going to go down the same road as Ireland in the next few years the chances of that happening are very small

Edited November 27, 2010 by realcrookswearsuits