The European Union generally, and the Eurozone specifically, have been going through a challenging period recently, even before the shock of the British referendum result. European institutions have frequently had to make decisions to ensure the stability of the European economy in areas where the legal regime was murky at best. Now, a few years after the peak of the Euro debt crisis, when some key decisions were made, we begin to see legal challenges to those decisions. This post examines how decisions in relation to financial support measures have ended up at Investment Arbitration Tribunals. The fact that these challenges exist proves that there may be limits to doing ‘whatever it takes’, as Mario Draghi declared, even when actions are considered economically necessary. The European Union is defined by its commitment to the rule of law. Extensive discretion conferred on institutions, like the ECB, may be helpful in combatting an economic crisis but can lead to legal challenges before European courts and in international tribunals. This post considers the illustrative case of Laiki Bank against Greece.

Laiki Bank, which was wound down as a condition of Cyprus’ €10 billion bailout, has appealed to the International Centre for Settlement of Investment Disputes (ICSID) against decisions of the Bank of Greece (BoG) relating to Emergency Liquidity Assistance (ELA). Laiki Bank claims to have incurred heavy losses because the Bank of Greece excluded it from accessing ELA, unlike other Greek banks during the crisis of 2012. Why were ELA disbursal decisions damaging to Laiki? Not being able to access ELA for its Greek branches, Laiki claims that it had to rely on the Central Bank of Cyprus. The Cypriot parent of Laiki drew in 2012 €9 billion from the Central Bank of Cyprus that had of course to be returned. Laiki argues that over half of this sum was used to finance its Greek operations. Laiki claims that the forced winding up of the bank would not have happened if its reliance on the Cypriot Central Bank was significantly lower. This would have been the case if the BoG had supported the liquidity needs of the Greek branches. Thus, Laiki claims it would not have been forcefully resolved, leading to significant losses for its investors and shareholders. Laiki’s lawyers were tasked with submitting a notice of dispute to the Greek Government on 21 November 2012 arguing that, on the basis of the Greece-Cyprus Bilateral Investment Treaty (BIT), its Greek banking operations ought to have received equal treatment to other Greek banks, and been allowed to access ELA via the BoG. Failing to receive a satisfactory response, Laiki commenced proceedings at ICSID on 16 July 2014.

ELA is a common central bank tool used in exceptional circumstances to grant credit to a financial counterparty, typically a bank, and against collateral. The notable feature of ELA relates to the ‘extraordinary circumstances’ prevailing when the refinancing takes place, circumstances which usually apply to the financial firm receiving the assistance, and not necessarily to the market as a whole. A typical ELA operation involves an ad hoc cash injection, which is targeted by the central bank specifically towards banks in need. While ELA is normally not used to fix liquidity imbalances affecting an entire economy, in the cases of both Greece and Cyprus almost the entire banking system benefited from support. The extent of the intervention gave obvious cause for concern to those worried about the rapid expansion of the ECB’s balance sheet. But, how were these decisions made? ECB rules provide that a National Central Bank (NCB) can supply money and/or any other assistance that may lead to an increase in central bank money to a solvent financial institution, or group of solvent financial institutions, that is facing temporary liquidity problems, without such operation being part of the single monetary policy. Responsibility for the provision of ELA lies with the NCB(s) concerned. This means that any costs of, and the risks arising from, the provision of ELA are incurred by the relevant NCB. However, Article 14.4 of the Statute of the European System of Central Banks (ESCB) assigns the Governing Council of the ECB the responsibility for restricting ELA operations if it considers that these operations interfere with the objectives and tasks of the Eurosystem or create unacceptable risks of loss.

But how is it decided who will actually get the money? The answer is, nobody knows. One could argue that the ECB Governing Council can pretty much do what it likes in relation to ELA, since the rules as they stand are self-imposed and self-policed. A decision to offer support to some banks rather than others on the basis of ‘nationality’ would not necessarily breach internal ECB rules, but it may well violate non-discrimination provisions built into BITs. This is exactly the reason for Laiki’s complaint. It is perfectly possible, therefore, that the way in which the BoG decided to extend ELA support violated either EU rules, or BIT provisions, or both. This is why an investigation into these issues is warranted, and also why ICSID actions may be a time-bomb ticking away under Eurozone rescue programmes. ICSID will give us its view, probably within 2017, but one should anticipate the CJEU reviewing these issues too.

Ioannis Glinavos is a Senior Lecturer at Westminster Law School, of the University of Westminster.