The European Court of Human Rights (ECtHR) has ruled that the imposition of a financial ‘haircut’ by the Greek Government on the value of bonds held by private individuals does not constitute a violation of their property rights (Art 1 of Protocol No. 1) or their right not to be discriminated against (Art 14) under the ECHR.
The parties to the case were the Greek Government and 6,320 Greek nationals who owned state bonds ranging in value from €10,000 to €1.5 million. The ‘haircut’ involved the exchange of existing bonds for new ones worth up to 53.5% less in nominal value. Such action was deemed necessary by the Government given the scale of the economic and financial crisis afflicting the country. Legal challenges to the measure failed in the domestic court system and so the issue came before the European Court of Human Rights in Strasbourg.
The Court agreed that the bonds came within the meaning of ‘possession’ as used in Article 1 to Protocol No. 1 and that therefore the right to the protection of property was engaged. However, while the Court accepted that the Government imposed ‘haircut’ was an interference with property rights, it did not represent a violation of those rights.
The Court found Greece’s actions were justified on two grounds: 1) they were in the ‘public interest’ and 2) the interference with the right was proportionate to the objective to be achieved.
Owing to the severity of the debt burden Greece faced, the Court felt that the Government could legitimately take action to achieve economic stability and debt sustainability in the interests of the community. The ‘haircut’ procedure had the effect of cutting Greek debt by approximately €107 billion and so was justified in terms of the broader public interest. Moreover, given that objective behind the ‘haircut’ was to save the Greek State from bankruptcy, the interference with the bondholders’ property rights was necessary and proportionate. The Court reasoned that the real monetary value of the bonds was already less than their nominal value on the date the ‘haircut’ was imposed. As a result, Greece would have been unable to pay out on the bonds in any event representing losses for the bondholders. The Court also acknowledged that investing in bonds is not risk free and that investors should be prepared for the vagaries and unforeseen events that such investments entail. Therefore, the impugned measures taken by Greece struck an acceptable balance between private property rights and the public interest and in light of the wide margin of appreciation enjoyed by the state in this sphere, the interference was not excessive or disproportionate to the legitimate aim of staving off financial ruin.
Arguments by the bondholders that their inclusion in the ‘haircut’ violated their right to not be discriminated against under Art 14 also fell on deaf ears. The bondholders contended that they had been subjected to similar treatment in respect of different situations, arguing that they could not be deemed comparable with legal entities that the ‘haircut’ had been initially designed for as they did not have the same level of skill or knowledge as the legal entities when it came to making investment decisions. It was, therefore, unfair to treat them in the same manner.
Despite this reasoning, the Court posited several reasons for rejecting the bondholders’ claim. First, it would have been too difficult to draw up criteria that would have differentiated between bondholders, other than drawing an arbitrary line based on the size of the bond in question. Second, such attempts would have compromised the speed needed to carry out the measure which would have posed further risks for the already perilous financial state of the Greek economy. And third, had the Government created different categories of bondholders and only imposed the haircut on some of them, it could have caused a mass transfer of the bonds into the exempted categories, thereby undercutting the effectiveness of the measure. Broad coverage was necessary for the measure to have the desired effect.
The Court thus found no violation of either Article 1 of Protocol 1 of the ECHR protecting property or of Article 14 prohibiting discriminatory treatment.
Click here to read the decision in the case of Mamatas & Others v Greece.