Cyprus Mail
CM Regular ColumnistOpinion

EU court ruling on hair cut was flawed

By Alper Ali Riza QC

ON 17 NOVEMBER 2014 the General Court of the European Union decided that the European Central Bank (ECB) and the European Commission had not caused the losses suffered by depositors with Bank of Cyprus and Cyprus Popular Bank.

It did so on the grounds that the bail-in of deposits – commonly known as a hair cut – was not imputable to the two EU institutions.

In plain English the two EU institutions were not legally responsible for the bail-in laws passed by Cyprus following the banking crisis in March 2013.

The court also decided perversely that the European Commission had not been in breach of its primary duty to ensure that the conditionality required of Cyprus was in accordance with EU law.

Mischievously, and somewhat disingenuously, the court ruled that the bail-in had been passed unilaterally by Cyprus and that the damage caused to depositors was attributable to Cyprus.

Consequently the EU could not be liable to pay compensation to depositors for the loss of their money and their claims failed without getting off the ground.

Causation is frequently an issue in proceedings in the courts. In simple cases involving a single cause the courts in England apply what is known as the “but for test” which seeks to identify the effective cause of the damage suffered.

But this is not easy to identify where there are a number of causes of an injury or loss. In such cases English law developed the principle of legal causation which introduces legal policy into the equation. In other words the courts decide as a matter of legal policy who ought to be responsible rather than precisely who caused the damage.

As far as measures taken in the context of EU law are concerned, the European Court of Justice (ECJ) has adopted a test that incorporates both the principle of effective cause and that of legal responsibility.

The test is known as the “true author test”. The court considers all the relevant circumstances and decides the true author of an impugned measure. Thus what the General Court had to do in the Cyprus bail-in cases was to ask a simple question: who was the true author of the bail-in law passed in Cyprus?

Unfortunately, the General Court failed to ask this crucial question but rather decided that it was possible to decide that Cyprus must have caused the loss of the bail-in law because Cyprus passed and implemented the bail-in law before the conditions under which Cyprus was to receive loan assistance were signed by the European Commission.

The decision of the General Court in this regard is obviously wrong in law and there will no doubt be an appeal to the ECJ.

The General Court’s decision is dead against principle contrary to precedent and in breach to the right to a fair trial. It is also forensically unsound since it failed to take into account clear evidence that Cyprus passed the bail-in law on 22 March 2013 as an integral part of prior compliance with the conditions required of Cyprus by the European Commission and the ECB.

The court appears to have decided that Cyprus, as the borrowing state, set the conditions under which it borrowed money, which is as absurd as it is counter-intuitive.

It also ignores the fact that under the European Stabilisation Treaty, pursuant to which the assistance was granted, Cyprus was given no choice but to pass the bail-in law on pain of disorderly departure from the eurozone and possible bankruptcy.

There was a lot of evidence before the court that the true authors of the bail-in measures were literally the Commission and the ECB. The General Court ignored clear evidence that the European Commission and the ECB were promoting the EU Recovery and Resolution Directive that included a bail-in tool for use across the whole of the EU long before it was imposed on Cyprus and that they had earlier sought to foist it on Cyprus in a draft Memorandum of Understanding of November 2012.

The plan at the time was that Cyprus was to give an undertaking to use the bail-in tool once the directive became law, which it was anticipated was going to be some time in June 2013, even though under the directive the bail-in tool was not going to be made available for use until 2018 to enable savers to place their money in safe institutions and banks to recapitalise to safe levels.

In the event the directive has still not become law.

There was the pre-election solemn binding vow by Mr Anastasiades that he would never agree to a hair-cut of bank deposits. This suggests that there is truth in his claim that he was pressured unfairly a few days into his presidency to do a volte face of such uniquely embarrassing proportions that gives credence to his claim that he was acting under duress.

The threat to have liquidity cut off is a matter of record and shows that it was indeed made by the ECB supported by the European Commission which, contrary to the submissions made to the court, was acting as an EU institution since only the ECB had the power to carry out the threat in the event of failure to comply with the demand to pass and implement a bail-in law.

As the old proverb goes: he who pays the piper calls the tune!

And finally there was evidence, which the court side-stepped – by its decision that the critical time was the date the Memorandum of Understanding was signed rather than the time Cyprus passed the bail-in law – that officials from the European Commission and the ECB arrived in Cyprus with indecent haste, armed with a draft bail-in law or technical expertise on bail-in that was then approved by the Cyprus House of Representatives.

The General Court also failed to take into account a number of other crucial points. First, the term assistance is a misnomer.

In actual fact it was a loan which will have to be paid back like any other debt. Also the assistance was not on offer altruistically as part of a foreign aid package to a third world country.

It was made available because it was deemed necessary to safeguard the eurozone as a whole. This was an important threshold criterion that had to be satisfied before Cyprus became eligible to receive loan assistance.

In effect the General Court has by its decision refused to investigate whether depositors in Cyprus were forced by the EU to pay billions to safeguard the stability of the eurozone.

More specifically, it has failed to investigate whether the European Commission and the ECB imposed the premature use of a bail-in tool on Cyprus in flagrant violation of the principle of legality that is acknowledged by the courts to be particularly important in financial matters. Quite apart from the fact that this was done in breach of the principle of equality and of the right to property.

The principle of legality is fundamental to the constitutional notion of freedom under the rule of law. People are free to do as they please unless there is a law that regulates or prohibits some conduct, in contra-distinction to the state that is not free to do anything unless it can point to a law that says it can.

It follows therefore that the EU could not require Cyprus to pass a bail-in law in its jurisdiction unless the directive the European Commission had been promoting became law.

It has been said that the EU court is a political court in the sense that broadly speaking it is an instrument of the EU in its overarching quest for an ever closer union.

It has also been said more controversially that so far as possible its judgements do not generally go against the wishes of the big states of the EU like Germany and France in respect of their vital interests.

In this case German wishes were not to use German taxpayers’ money to protect Russian depositors in Cyprus. But the judges of the court had a duty to decide cases impartially and conscientiously.

This implies that in so far as they may act politically this can only be at the subliminal level rather than the crude technical approach they adopted against depositors in Cyprus for political reasons.

Judging cases impartially and conscientiously means making decisions that are evidence-based, taking into account the arguments put forward by both sides, and providing proper reasons for rejecting or accepting the arguments of each party without skating over the arguments or massaging the facts.

Regrettably, the General Court skated over the arguments of the claimants and massaged the facts on causation when it decided that technically it was Cyprus that caused the bail-in law to be passed.

The court also failed to take into account the bigger picture which was that it was the EU that compelled Cyprus to impose a hair-cut on Greek bonds held by the two banks that caused their assets to be depleted enormously.

It was also the EU that compelled Bank of Cyprus, the Cyprus Popular Bank and the Hellenic Bank to dispose of their assets in Greece at a huge discount effectively throwing Cyprus to the wolves to protect the eurozone from contagion from Greece.

It is also crucial to recall that the application for assistance made by Cyprus in June 2012 was to recapitalise its two biggest banks on account of their negative exposure to Greece.

This was welcomed initially by the EU before its attitude changed to a demand to close them down six months later. Furthermore, the application was made to the EU not to the European Stability Mechanism (ESM) and that in accordance with the principle against retrospection the court should have considered the EU not the ESM as the true decision maker.

The two biggest banks in Cyprus were said by the ECB to be insolvent. The General Court was wrong not to have allowed this allegation and the process by which the two banks got into financial difficulties as well as the true authorship of the bail-in tool to be investigated fully by an independent court investigator and tested at a full trial rather than on the basis of allegations and in a manner that may be seen by many to be politically expedient.

Alper Ali Riza QC of Goldsmith Chambers Temple London, is a barrister and one of HM part time judges.

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