Greek economic crisis: are sovereign bonds protected “investments” under Bilateral Investment Treaties? ICSID Case No. ARB/13/8

By Stella Petritsi, a Solicitor at Thomas Cooper in Piraeus, Greece

Despite broad interpretation of “investment” in Bilateral Investment Treaties (“BITs”), an ICSID tribunal (“the Tribunal”) found on 9 April 2015 that the purchase of Greek Government Bonds did not constitute an “investment” in Greece. Whether under the Slovakia – Greece BIT, the Greece – Cyprus BIT or the ICSID Convention. Lacking jurisdiction on that basis, the Tribunal dismissed claims brought by Poštová banka (“Postova”), a Slovak bank, and its majority shareholder Istrokapital SE (“Istrokapital”), a company incorporated in Cyprus, against the Hellenic Republic (“Greece”).

In 2009, rating agencies downgraded Greek debt, including Greek Government Bonds (“GGBs”). In 2010, Postova purchased GGBs at a total face value of €504,000,000 through a series of transactions via the secondary market. In February 2012, Greece initiated a sovereign debt restructuring through an exchange of outstanding GGBs for new titles, following an order of the IMF. Despite voting against the restructuring proposals, Postova was forced to accept a replacement of its GGBs with new securities. Postova and Istrokapital turned to ICSID, seeking compensation for Greece’s alleged violation of the BITs’ provisions on investment protection and promotion. Greece challenged ICSID’s jurisdiction on several grounds.

Key legal issues and the Tribunal’s findings
Can Istrokapital claim compensation for any losses under the Greece – Cyprus BIT?
Istrokapital, claimed it had made an indirect investment in Greece, through Postova’s purchase of the GGBs, and such investment was protected under Article 1(c) of the Greece – Cyprus BIT as assets comprising “monetary claims or any other claim arising out of a contract and having economic value”.

In accordance with prior case law [1], the Tribunal found that Istrokapital had no standing to pursue claims directly over Postova’s assets, as it had no legal right to such assets. Istrokapital would have had a right to assert claims based on measures taken against Postova’s assets, if such measures had impaired the value of Istrokapital’s shares. Istrokapital, however, did not rely on its shareholding in Postova to bring its claim.

Had Istrokapital had standing to bring a claim, would its interests qualify as protected “investments” under the Greece –Cyprus BIT?
The Tribunal’s answer would have been negative. The list of examples in Article 1 of the Cyprus-Greece BIT expressly refers to bonds issued by companies. There is no reference to financial instruments (not even, as in the case of the Slovakia – Greece BIT, a reference to loans). Further, there is no language that suggests that the State parties intended to include public debt or public obligations. Finally, the general reference to “monetary claims” cannot be expanded to include instruments such as the GGBs.

Are GGBs “investments” under the chapeau of Article 1 of the Slovakia – Greece BIT?
Postova claimed that its interests in the GGBs fell within the broad definition of “investment” contained in the chapeau of Article 1 of the Slovakia – Greece BIT, defining “investment” as “every kind of asset and in particular, though not exclusively, includes…”

The Tribunal disagreed. In their interpretation of the treaty, the Arbitrators considered the language of the BIT’s provisions, the Vienna Convention on the Law of Treaties, similar wordings in other BITs and previous case law. The Tribunal was of the view that “the list of examples provided by the Slovakia – Greece BIT must…be considered in the context of the treaty and be given some meaning together. Otherwise, if the interpretation stops by simply indicating that any asset is an investment, the examples will be unnecessary, redundant or useless…”

The Arbitrators found that the language used in Article 1(1) of the Slovakia – Greece BIT simply provides that “[i]nvestment means any type of asset…”, as opposed to wider language used in other BITs such as “independent of the legal form adopted” (Article 1 of the Argentina – Italy BIT). The GGBs constitute sovereign debt and are securities. Sovereign debt has certain distinct characteristics, while securities are subject to specific and strict regulations. Neither Article 1(1) of the Slovakia-Greece BIT nor other provisions of the treaty refer, in any way, to sovereign debt, public titles, public securities or public obligations. The Tribunal considered that the Slovakia – Greece BIT does not contain language that may suggest that the State parties considered, in the wide category of investments of the list of Article 1(1) of the BIT, public debt or public obligations, much less sovereign debt, as an investment under the treaty.

Are GGBs “investments” under Article 1(b) of the Slovakia – Greece BIT?
The Tribunal further considered whether Postova’s interests in GGBs fall within the category of “shares in and stock and debentures of a company and any other form of participation in a company” as in Article 1(b) of the BIT.
The Arbitrators found that the text in Article 1(b) leaves no doubt that the bonds referred to thereunder are only bonds issued by a company, not sovereign debt in general, or bonds issued by either State party to the treaty, in particular.

Are GGBs “investments” under Article 1(c) of the Slovakia – Greece BIT?
Postova further claimed that its interests in the GGBs constitute “loans, claims to money or to any performance under contract having a financial value” and are, therefore, protected investments under Article 1(c) of the BIT.
The Tribunal dismissed this argument on the grounds that, loans and bonds are distinct financial products. Article 1(c) refers to “loans, claims to money or to any performance under contract having a financial value”, as opposed to reference to a general concept such as “obligations” or “public titles” (Article 1 of the Argentina – Italy BIT).
Neither was a contractual relationship between Greece and Postova found to exist. The Greek Government issued the GGBs, through a System administered by the Bank of Greece, to the Participants in the System and the Participants paid the consideration due to Greece. Participants in turn delivered the GGBs to Primary Dealers, who provided the funds for the acquisition. Primary Dealers, in turn, sold the GGBs in the secondary market. Postova was neither a Participant, nor a Primary Dealer. It acquired the vast majority of its interests in the GGBs well after the initial distribution process had been completed.

Are GGBs “investments” under the ICSID Convention?
ICSID’s jurisdiction, under Article 25 of the ICSID Convention, extends to “any legal dispute arising directly out of an investment, between a Contracting State and a national of another Contracting State…” Absent a definition of investment in the Convention, tribunals have held that an objective definition of “investment” requires the elements of (a) contribution of money or assets, (b) duration and (c) risk.

The Tribunal considered, by a majority, that under the objective approach to the definition of “investment”, Postova’s acquisition of the interests in GGBs would not constitute an investment under the Convention, and as a consequence, if that criteria were applied, the Tribunal could not assert jurisdiction.

Interestingly, the Tribunal’s findings above, were contrary to those in Abaclat v Argentina [2], mainly due to the different wording between the Slovakia – Greece, the Greece – Cyprus and the Italy – Argentina treaties. The Arbitrators found that the Slovakia – Greece and the Greece – Cyprus BITs do not contain the wide language that the Abaclat tribunal considered as language that would comprise bonds, i.e., “any right of economic nature conferred under law or contract.” “Any right of an economic nature” is a wider concept than claims to money under contract.

The Tribunal’s lack of jurisdiction
There being no protected investment under the Slovakia-Greece BIT, the dispute subject matter of the arbitration was held not to be related to an investment, and therefore such dispute was decided not to fall under the jurisdiction of ICSID and the competence of the Tribunal.

Despite the definition of “investment” seeming broad, a BIT may not be broad enough to cover a government bond as an investment. The text of a BIT is carefully drafted to reflect the objectives of the particular State parties and is as similar to the wording of other BITs as it is different.

The definition of investment under BITs is subject to ongoing investigation. The Greek financial crisis affected the Cypriot economy through the exposure of Cypriot banks to Greek sovereign debt. The financial measures Cyprus had to take in 2013 to save the state economy caused substantial losses to Greek bondholders and depositors in Cypriot banks. Such bondholders and depositors have turned to ICSID as “investors” in Cyprus, seeking compensation for their losses under the Greece – Cyprus BIT. Whether such bonds and bank account deposits constitute protected “investments” under that BIT remains to be determined in two currently on-going ICSID arbitrations.

[1] HICEE B.V. v. Slovak Republic, UNCITRAL, PCA Case No. 2009-11
ST-AD GmbH v. Republic of Bulgaria, UNCITRAL, PCA Case No. 2011-06
El Paso Energy International Company v. The Argentine Republic, ICSID Case No. ARB/03/15
BG Group Plc. v. The Republic of Argentina, UNCITRAL
Urbaser S.A. & Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. Argentine
Republic, ICSID Case No. ARB/07/26
CMS Gas Transmission Company v. Argentine Republic, ICSID Case No. ARB/01/8
Sergei Paushok & Ors. v. Government of Mongolia, UNCITRAL, Award on Jurisdiction and Liability of
April 28, 2011
[2] Abaclat and Others v. Argentine Republic, ICSID Case No. ARB/07/5.

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