How corporations and lawyers are scavenging profits from Europe’s crisis countries Authors: Cecilia Olivet & Pia Eberhardt with contributions from Nick Buxton and Iolanda Fresnillo. Editor: Katharine Ainger Design and illustrations: Ricardo Santos Amsterdam/Brussels, March 2014 Published by the Transnational Institute and Corporate Europe Observatory Contents of the report may be quoted or reproduced for non-commercial purposes, provided that the source of information is acknowledged. Acknowledgements We would like to thank Lisa Brahms, Nick Dearden, Tomaso Ferrando, Peter Fuchs, Ioannis Glinavos, Kenneth Haar and Pietje Vervest for insightful comments to the different drafts of the texts. We are also grateful to Lyda Fernanda Forero for research support. How corporations and lawyers are scavenging profits from Europe’s crisis countries Contents Executive summary 6 Chapter 1 Introduction: protecting speculators, endangering democracy 9 Chapter 2 Never let a good crisis go to waste 10 Chapter 3 Greece and Cyprus: falling into the debt trap 18 Chapter 4 Spain’s solar dream becomes a legal nightmare 26 Chapter 5 Legal sharks circling crisis countries 36 Chapter 6 Conclusion: ending corporations’ VIP treatment 44 Profiting from Crisis Executive summary Profiting from Crisis looks closely at how corporate investors have responded to the measures taken by Spain, Greece and Cyprus to protect their economiesˆ in the wake of the European debt crisis. In Greece, Postová Bank from Slovakia bought Greek debt after the bond Profiting from Crisis is a story about how corporations, value had already been downgraded, and was then backed by lawyers, are using international investment offered a very generous debt restructuring package, yet agreements to scavenge for profits by suing governments sought to extract an even better deal by suing Greece from Europe’s crisis countries. It shows how the global using the Bilateral Investment Treaty (BIT) between investment regime thrives on economic crises, but is very Slovakia and Greece. In Cyprus, a Greek-listed private uneven in who it benefits. While speculators making risky equity-style investor, Marfin Investment Group, which investments are protected, ordinary people have no such was involved in a series of questionable lending practices, protection and – through harsh austerity policies – are is seeking €823 million in compensation for their lost being stripped of basic social rights. investments after Cyprus had to nationalise the Laiki For a long time, European countries were left unscathed Bank as part of an EU debt restructuring agreement. by the rising global wave of investor-state disputes which In Spain, 22 companies (at the time of writing), mainly had tended to target developing countries. In the wake private equity funds, have sued at international tribunals of the global financial crisis, however, corporations and for cuts in subsidies for renewable energy. While investment lawyers have turned their eyes to potential the cuts in subsidies have been rightly criticised by pickings in Europe. An investment regime, concocted environmentalists, only large foreign investors have the in secretive European board rooms, and that gives ability to sue, and it is egregious that if they win it will be corporations powerful rights to sue governments, has the already suffering Spanish public who will have to pay finally come home to roost. to enrich private equity funds. The report first explores the history of investor-state Profiting from Crisis reveals how: lawsuits as a result of economic crises across the world • The public bailout of banks that led to the European from Mexico in 1994 to Argentina in 2001. As crises debt crisis could be repeated with a second public struck these nations scrabbled desperately to protect their bailout, this time of speculative investors. Corporate rapidly sinking economies; the measures they took have investors have claimed in arbitration disputes more since come under systematic attack from corporations. than 700 million euros from Spain; more than one Countries have been sued for measures to revive a billion euros from Cyprus and undisclosed amounts domestic financial system or the freezing of public from Greece. This bill, plus the exorbitant lawyers’ services’ tariffs to keep them affordable for their people. fees for processing the cases, will be paid for out of Some measures, such as sovereign debt restructuring the public purse at a time when austerity measures (renegotiating terms with creditors) are even required as have led to severe cuts in social spending and part of debt deals, yet have been similarly challenged by increasing deprivation for vulnerable communities. investment lawsuits. In 2013, while Spain spends millions on defending itself in lawsuits, it cut health expenditure by 22 per The legal bases of these lawsuits are the over 3,000 cent and education spending by 18 per cent. international investment treaties in existence to date. They contain far-reaching protections of private property • Many of the investment lawsuits under way against enshrined in catch-all clauses such as “fair and equitable European crisis countries are being launched by treatment” and “protection from indirect expropriation”. speculative investors. They were not long-term The trouble is that these clauses have been interpreted investors but those which invested as the crisis so broadly that they gave a carte blanche to first emerged and were therefore fully cognisant of corporations to sue states for any regulations that the risks. Yet rather than paying the costs of risky could be deemed to affect current or future profits. investments, investment agreements have given Moreover, investment treaties grant corporations rights them an escape clause and are being usedˆ to extract to protection, without giving equivalent rights to states further wealth from crisis countries. Postová Bank, to protect their own citizens. for example, bought bonds in early 2010 at the same 6 How corporations and lawyers are scavenging profits from Europe’s crisis countries time that Standard & Poor’s categorised Greece’s debt • The European Commission (EC) has played a complicit as “junk”. In Spain, out of 22 companies involved and duplicitous role, effectively abetting this wave of in lawsuits, 12 invested after 2008 when the first corporate lawsuits battering crisis-hit countries. Some restrictions to feed-in tariffs for solar energy were of the lawsuits have arisen due to debt and banking introduced; eight more continued to invest in the restructuring measures that were required as part of country despite the ‘threats’ to their investments. EU rescue packages. Moreover, while the EC has been critical of BITs (Bilateral Investment Treaties) between • The investors involved in lawsuits have profited EU member states (known as intra-EU BITs), they considerably despite the ‘threat’ˆ to their investments continue to actively promote the use of investor-state by the crisis countries. Postová Bank reported a net arbitration mechanisms worldwide, most prominently profit of 67.5 million euros in 2012; renewable energy in the current negotiations for the controversial EU-US investor Abengoa SA reported a 17% increase in trade agreement (TTIP). Defending corporate protec- revenues to 5.23 billion euros in the first nine months tion while denying social protection is a disturbing of 2013. It has been a very different story for the indictment of current priorities in European trade and citizens of the countries being sued. Greeks, for economic policies. example, are on average almost 40% poorer than they were in 2008 and there has been a drastic rise • The investment arbitration regime provides VIP in homelessness. One in three children (around treatment to foreign investors and privatises jus- 600,000) are now living under the poverty line. tice. Foreign investors are granted greater rights than domestic firms, individuals or communities, even when • Corporate investors have been supported and these are just as affected by the measures that led to encouraged by highly paid investment lawyers the dispute. The cases are judged by a tribunal of three who continuously and actively identify litigation private, for-profit lawyers who get to decide on policies possibilities. In a few cases, arbitration firms suing that affect the welfare of millions of people. Some of cash-strapped countries were also advising the them have ignored international legal principles that very same companies when they made the risky allow for states to violate their international obligations investments in the first place. UK-based law firm when it is necessary to protect the interests of their Allen & Overy, now counsel to investors in five out of citizens, especially in crisis situations. seven known claims (at the time of writing) against Spain relating to subsidy cuts in the energy sector, The deepening crisis in the European periphery has advised some of these investors in their original attracted more and more circling vultures, scavenging for acquisition of the power plants. The corporate profits. In 2012, New York-based Greylock Capital argued lawyers’ marketing has paid off with a boom in that buying Greek bonds was “the trade of the year”. cases and healthy profits and income for these elite At the time, investors were paying 19 to 25 cents for firms. UK-based Herbert Smith Freehills, hired to bonds for every dollar worth of bonds. represent Spain in at least two cases, for example, is retained at a fee of 300