Grexit and the potential implications for finance documents

Grexit and the potential implications for finance documents

'Oxi' was the cry of the Greek anti-austerity camp on Sunday, as it celebrated victory in the referendum over the debt repayment proposals put forward by Greece's three main creditors, the IMF, the ECB and the EU. Not that everyone is celebrating; the result has edged Greece closer to an exit from the Eurozone and some predict financial disaster for Greece should a 'Grexit' take place.

So if Greece does exit the Eurozone, how might it happen? And what are the implications for finance documents?

As there is no formal process in place for a nation to withdraw from the euro, considering how a Grexit would pan out involves speculation.  However, there are two likely scenarios.

First, the EU could manage the withdrawal, either from the Eurozone or from the EU as a whole. This scenario would require agreement from the other member states and fresh EU legislation would need to be drawn up to facilitate a Greek withdrawal.

Second, a Greek withdrawal (again from the Eurozone or the EU) without the consent of the other member states. This would involve Greece passing legislation invoking monetary sovereignty, setting out a timetable for establishing a new currency, and redenominating all its debts into its new currency.

Whichever of these scenarios occurs it's clear that time is running out for Greece; its banks are on extended holiday and on the verge of running out of cash and collapsing. Indeed, in the wake of the referendum result, Germany's deputy chancellor and economics minister Sigmar Gabriel says Greece faces insolvency.

What are the potential implications for finance documents?

Lenders and borrowers alike need to consider whether they have any loans or other agreements which might be affected by a Grexit.

Where you are dealing with a Greek borrower or lender, or where any assets over which security has been taken are located in Greece, all your documentation needs to be carefully considered.

However, there are wider implications where a borrower may be a party to other agreements which might impact their ability to service their debt obligations, for example import/export agreements with Greek third parties.

The main clauses which lenders and borrower should be concerned with include:

  • Jurisdiction and governing law: if any agreement provides that the Greek courts have jurisdiction or the agreement is governed by Greek law, an English court would only be able to refuse to recognise and enforce the judgment of the Greek courts if that judgment is considered to be 'manifestly contrary' to English public policy
  • Currency and place of payment: the currency of payment under the agreement and whether the agreement envisages payment in a currency other than euros will need careful consideration. The place of payment may also be relevant, if payment is to be made in Greece, in the absence of a currency definition, this is likely to be interpreted as payment in the currency of Greece as it may change from time to time. An added complication may be that Greece may make payment in euros under agreements made after a certain date illegal under any redenomination legislation;
  • Events of default: a borrower's revenues from Greek trade partners may impact their financial position, thereby creating a material adverse change event of default under any loan agreement. A borrower may also default under the non-payment event of default, either by trying to repay in a currency not contemplated by the agreement or as a result of financial difficulties caused by the economic situation in Greece; and
  • Currency indemnities: standard provisions do not envisage the situation where a Eurozone member has withdrawn from the euro, but each document should be examined on a case-by-case basis.

Another aspect of the current situation is the knock-on effect a Grexit may have on other struggling Eurozone economies. Greece makes up less 2% of Eurozone GDP but any exit will offer a precedent for other larger debt-ridden countries, such as Italy and Spain, to rally against the anti-austerity measures being imposed on them.

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About the author:

Miranda is a solicitor specialising in leveraged and acquisition finance. She trained at Hogan Lovells International LLP and qualified into the international banking and finance team. During her time at Hogan Lovells she worked on a variety of domestic and cross-border transactions, acting for both borrowers and lenders. She also experienced secondments to Barclays Bank PLC and Kaupthing Bank hf.