A US Supreme Court ruling has made restructuring sovereign debt more difficult, leaving both debtors and creditors worse offThe US supreme court's ruling obliges Argentina to pay holdout hedge funds in full as part of its debt-restructuring agreements.

Argentina and its bankers have been barred from making payments to fulfil debt-restructuring agreements reached with the country's creditors, unless the 7% of creditors who rejected the agreements are paid in full – a judgment that is likely to stick, now that the US supreme court has upheld it. Though it is hard to cry for Argentina, the ruling in favour of the holdouts is bad news for the global financial system and sets back the evolution of the international regime for restructuring sovereign debt. Why is it so hard to feel sympathy for a developing country that is unable pay its debts? For starters, in 2001 Argentina took the unusual step of unilaterally defaulting on its entire $100bn debt, rather than negotiating new terms with its creditors. When the government finally got round to negotiating a debt swap in 2005, it could almost dictate the terms – a 70% "haircut". In the intervening decade, President Cristina Fernández de Kirchner and her late husband and predecessor, Néstor Kirchner, have pursued a variety of spectacularly bad economic policies. The independence of the central bank and the statistical agency has been severely compromised, with Fernández forcing the adoption, for example, of a consumer price index that grossly understates the inflation rate. Contracts have been violated, foreign-owned companies have been nationalised, and when soaring global prices for Argentina's leading agricultural commodities provided a golden opportunity to boost output and raise chronically insufficient foreign-currency earnings, Fernández imposed heavy tariffs and quotas on exports of soy, wheat and beef. Some might counter that the holdout hedge funds that sued Argentina deserve no sympathy either. Many are called "vulture funds", because they bought the debt at a steep discount from the original creditors, hoping to profit subsequently through court decisions. The problem with the Argentine debt case has little to do with the moral failings of either the plaintiffs or the defendant. It lies in the precedent it establishes for resolving future international debt crises. The most common reaction to the recent rulings is pro-holdout. After all, the judge is only enforcing the legal contract embodied in the original bonds, isn't he? As the former US president Calvin Coolidge supposedly said of US loans to its first world war allies: "They hired the money, didn't they?"

If only the world were so simple. If only a regime of consistent enforcement of all loan contracts' explicit terms were sufficiently practical to be worth pursuing. We have, however, long since recognised the need for procedures to rewrite the terms of debt contracts under extreme circumstances.

The British Joint Stock Companies Act of 1856 established the principle of limited liability for corporations, and indentured servitude and debtors' prisons have been illegal since the 19th century. Individuals and corporations can declare bankruptcy. There will always be times when it is impossible for a debtor to pay.

As for corporate bankruptcy, it is recognised that it is a poor legal system that keeps otherwise viable factories shuttered while assets are frittered away in expensive legal wrangling, leaving everyone – managers, workers and shareholders – worse off. A good legal system permits employment and production to continue in cases where the economic activity is still viable; divides up the remaining assets in an orderly and generally accepted way; and makes these determinations as efficiently and speedily as possible, while discouraging future carelessness by imposing costs on managers, shareholders, and – if necessary – creditors.

No such body of law exists at the international level, and some believe this vacuum is the primary difficulty with the international debt system. Ambitious proposals to redress it, such as a sovereign debt restructuring mechanism (SDRM) housed at the International Monetary Fund, have always run into political roadblocks.

Incremental steps had, however, been slowly moving the system in the right direction since the 1980s. In the international debt crisis that began in 1982, IMF country adjustment programmes went hand-in-hand with "bailing in" creditor banks through "voluntary" coordinated loan rollovers. Eventually, it was recognised that a debt overhang was inhibiting investment and growth in Latin America, to the detriment of debtors and creditors alike.

Subsequent programmes to deal with emerging-market crises featured an analogous combination of country adjustment and "private sector involvement". Voluntary debt exchanges worked, roughly speaking, with investors accepting haircuts.

After Argentina's 2001 unilateral default, many investors saw more clearly the need to allow explicitly for less drastic alternatives ahead of time, and incorporated so-called collective action clauses (CACs) into debt contracts. If the borrower runs into trouble, CACs make it possible to restructure debt with the agreement of a substantial majority of creditors, usually around 70%. The minority is then bound by the agreement.

Such incremental steps gave rise to a loose system of debt restructuring. To be sure, it still had many deficiencies. Restructuring often came too late and provided too little relief to restore debt sustainability. But it worked, more or less. In contrast, the US court rulings' indulgence of a parochial instinct to enforce written contracts will undermine the possibility of negotiated restructuring in future debt crises.

Time will run out for Argentina at the end of July. Unable to pay all of its debts, it will perhaps be forced to default on all of them. The more likely outcome, however, is that it will manage to come to some accommodation that the holdouts find more attractive than the deal accepted by the other creditors. Either way, future voluntary debt-workout agreements have just become more difficult to reach, which will leave debtors and creditors alike worse off.
Meanwhile in Europe : Troubled Portuguese lender Banco Espirito Santo is set to be split into "bad" and "good" banks under a multi-billion euro state rescue plan.  The plan, aimed at saving a bank that has been engulfed by the fall of the owning family’s business empire, includes using at least half of the €6bn (£4.8bn) left from Portugal’s recently exited international bailout program, sources said. The bailout money will be used to finance a special bank resolution fund set up by Portugal in 2012 that will in turn inject money into the new Banco Espirito Santo, or BES, "good bank". BES shares would be delisted under the plan, with shareholders likely to lose their investment. One source told the Reuters agency that the injection could be of at least €4bn. It was not clear how the bad bank would be handled. The plan, which is also being worked on by officials from the European Central Bank and European Commission, is expected to be announced on Sunday evening. Details were still being hashed out and an announcement could be postponed until Monday, the people familiar with the talks said. Anything in order to stop the first domino from falling.
Why? ... As the powers that be know, that once the first 'Credit Default Swap' is triggered, it will it turn trigger a long line of other CD'S. A process which will in turn reveal the 'fact' that our entire global financial system is little more than a gigantic 'Pyramid Scheme'.... A structure without 'any' type of foundation.
Quite literally 'A Pyramid Of lies'. 

BRUSSELS - The Danish and German economies have benefited most among 14 EU countries from the expansion of the bloc's single market between 1992-2012, according to a study published Monday (28 July) by the Bertelsmann Stiftung, a German foundation.

Over those 20 years, German real gross domestic product rose by an average of €37 billion per year, translating into a yearly income rise of €450 per person. Danish citizens had a yearly income rise of €500 over that same period. Austria and Finland rank third and fourth, respectively, with gains above €200 per person, followed by Sweden and Belgium (€180). At the other end of the scale are Italy (€80/year/person), Spain and Greece (€70/year/person) and Portugal with an increase of only €20 in per capita income per year.

The study also quantifies how these 14 economies would have fared in the absence of more EU integration since 1992.

Again, Germany and Denmark would have lost the most: over two percent of their per capita GDP in 2012 would have been scrapped if there was no EU single market. This would have led to personal income losses of €720 per year in Denmark and €680 in Germany.

According to the study, only Greece would have gained from no EU single market: its per capita GDP would have been higher by 1.3 percent or €190.

In a timely report given the latest EU sanctions on Russia, the IMF says the growing tensions over Ukraine could undermine financial markets in Europe and beyond. It also warns of the effect of rising interest rates. My colleague Katie Allen writes:Rising interest rates in advanced economies and a slowdown in emerging markets could combine to cut global growth by as much as 2%, the International Monetary Fund has warned.Its latest report into how policy moves in one country can spill over into others also highlights the threat that tensions in Russia and Ukraine could send shockwaves through financial and commodity markets across Europe, central Asia and beyond. The IMF’s main concerns, however, centre around two key factors emerging as the global economy “shifts from crisis to recovery mode”.  It highlights the challenge for central banks of smoothly unwinding the ultraloose monetary policy they brought in to support advanced economies during the financial crisis. Secondly, it warns that emerging market economies are slowing in a “synchronised and protracted manner” and that poses risks to the rest of the world in terms of trade and finance. The report is the latest to emphasise the complex task of returning to more normal interest rates after years of extraordinary measures to shore up markets and confidence. In the UK, base rates have been at a record low of 0.5% for more than five years while in both the US and UK there have been vast money printing schemes, known as quantitative easing.

Russia's ambassador to Britain, Alexander Yakovenko, said the U.S. has no real evidence. "Russia doesn't supply weapons to local de facto (separatist) authorities in eastern Ukraine...no evidence whatsoever has been presented that the Russian government has been doing this."  However, a NATO source confirmed to Reuters that they had seen arms being transported from Russia to eastern Ukraine. The information Russia is denouncing is coming from multiple sources around the world. The U.S. is even saying that artillery shelling now being directed at Ukraine is being fired by the Russian military from the other side of the border. While U.S. intelligence has not directly stated Russia is responsible for the shooting, they have been able to link Russia to the missile, and "still believed the separatists were likely to blame." Additionally, Alexander Khodakovsky, a rebel leader, stated the separatists have a BUK missile system. This missile system is likely what fired the shot that took down MH17. Alexander Borodai, the self proclaimed prime minister of the Donetsk People's Republic, denied having this system.  Anatoly Antonov, deputy defense minister, said that U.S. intelligence did not do diligent research, and instead "mostly cited social networks." In fact, had U.S. intelligence cited only social networks, they would have been able to confirm the separatists were responsible almost two hours before anyone knew the plane crashed. Before news of the MH17 crash broke, rebel leader Igor Girkin posted on social media that rebels had shot down a "military transport aircraft." Instead, it ended up being a commercial airliner. Girkin quickly removed the post. 

A group of international aviation experts and policemen have refused to work at the Malaysia Air Boeing 777 crash site due to concerns regarding their reputation as experts, since the outcome of their investigation was dictated by "bruxelles, berlin" and others, and decided instead to return to Donetsk, a representative of the OSCE delegation told RIA Novosti Monday.

Earlier today, the group arrived in the Ukrainian city of Torez where the plane crashed on July 17. The group consists of Dutch and Australian experts, as well as policemen from Holland.

The group was organized by OSCE representatives, but had to change its itinerary due to the ongoing clashes between Kiev and independence forces, particularly in the city of Shakhtarsk. Upon its arrival in Torez, the group made a decision to return to Donetsk. A spokesman from Ukraine’s National Security information center, Andriy Lysenko, claimed earlier that the Ukrainian National Guard took control of the cities of Debaltseve, Shakhtarsk, Torez and Lutuhyne. The deputy head of the Council of Ministers of the self-proclaimed People’s Republic of Donetsk, Vladimir Antiufeev, pledged at the press conference that the authorities of the region continue to do their best to facilitate the experts’ work. Antiufeev stressed, however, that Kiev was intentionally derailing the mission. A Malaysia Airlines Boeing 777 with 298 people, including 27 Australian citizens, on board crashed on July 17 near the Ukrainian city of Torez. On July 21, the UN Security Council unanimously adopted a resolution, which was praised by the Russian Foreign Ministry. The 15-member council said in a resolution it "supports efforts to establish a full, thorough and independent international investigation into the incident in accordance with international civil aviation guidelines."

Earlier today, Russian Foreign Minister Sergei Lavrov expressed hope that no one would attempt to corrupt the investigation into the crash of the airliner. “We hope that sensibility will prevail and at the forefront we all put the task of explaining the truth, holding an absolutely unbiased investigation, without any attempt to anticipate its results. We hope that our partners, who have said long ago that they have some sort of uncontestable information, will make this information public and open, and won’t cite confidentiality, secrecy or any other reason," Lavrov said during a briefing Monday. The Ukrainian government and militia forces have been blaming each other for the downing of the airliner, with independence supporters saying they lacked the equipment to shoot down a target flying at altitude of 32,000 feet.

Investors in the former Russian oil company Yukos expect to receive a multi-billion pound financial settlement on Monday in a landmark case that threatens maximum embarrassment for BP and the Kremlin at a sensitive time. Europe's top arbitration court in The Hague has been hearing a case about the illegal expropriation of assets brought by five investors including the former Yukos chief executive, Platon Lebedev. A ruling in favour of GML, the majority shareholders in Yukos, would be damaging to BP because the disputed Yukos assets ended up in the hands of another major oil company, Rosneft, in which it owns a 20% stake. It would also be a setback for the Kremlin at a time when it is under pressure from the west over its role in eastern Ukraine.

The claim, under the energy charter treaty, amounts to $103.5bn (£61bn). Yukos was originally set up by Mikhail Khodorkovsky with Lebedev's help, but the company crumbled in 2004 when the Russian government demanded it paid $27bn in taxes. Both Khodorkovsky and Lebedev were jailed. They have recently been released, but Yukos's oil fields and other assets were auctioned off and eventually bought by Rosneft. Yukos, once Russia's biggest company, and many western supporters maintained that the tax bill and jalings were a result of Vladimir Putin wanting to rid himself of oligarchs who were using their corporate power base to meddle in politics. But the Kremlin has always argued that all the actions taken against Yukos and its executives were entirely justified under the Russian law. Khodorkovsky sold off his interest in Yukos to pay his legal expenses, but Lebedev has led GML to bring what is believed to be the largest ever arbitration case in history.

Tim Osborne, a British lawyer and director of GML, is planning to make a statement about the arbitration findings when the court in The Hague makes its final ruling at 9am London time.

The result remains unknown, but a spokesman for GML said: "We are organising a big press conference. We would not be doing this unless we firmly expected to win."

Excellent - written by - Robert Skidelsky, a member of the House of Lords

While the rest of the world recovers from the great recession of 2008-2009, Europe is stagnating. Eurozone growth is expected to be 1.7% next year. What can be done about it?

One solution is a weaker euro. Earlier this month, the chief executive of Airbus called for drastic action to reduce the value of the euro against the dollar by about 10%, from a "crazy" $1.35 to between $1.20 and $1.25. The European Central Bank (ECB) cut its deposit rates from 0 to -0.1%, effectively charging banks to keep money there, but these measures had little effect on foreign exchange markets. That is mainly because nothing is being done to boost aggregate demand. The UK, US and Japan all increased their money supply to revive their economies, with currency devaluation becoming an essential part of the recovery mechanism. The ECB's president, Mario Draghi, often hints at QE – last month, he repeated that "if required, we will act swiftly with further monetary policy easing" – but his perpetual lack of commitment resembles that of Mark Carney, the Bank of England governor, whom one former UK government minister recently likened to an "unreliable boyfriend".

The ECB's inaction is not, however, wholly responsible for the appreciation of the euro's exchange rate. The pattern of current account imbalances across the eurozone also plays a large role.

Germany's current-account surplus, the largest in the eurozone, is not a new phenomenon. It has existed since the 1980s, falling only during reunification, when intensive construction investment in the former east Germany more than absorbed the country's savings. The external surplus has grown especially rapidly since the early 2000s, and today it remains close to its pre-crisis 2007 level, at 7.4% of GDP. Now, however, countries previously stricken with deficits are moving into surplus, which means the eurozone's current account is increasingly positive. Indeed, the eurozone-wide surplus is now expected to be 2.25% of GDP this year and next. The eurozone is saving more than it is investing, or, equivalently, exporting more than it is importing. This is strengthening its currency.

Back in October 2013, the US Treasury pointed the finger at Germany's structural surplus as the source of Europe's woes. Its argument was that if one country runs a surplus, another must run a deficit, because the excess savings/ exports of the surplus country must be absorbed by another country as investment, consumption, or imports. If the surplus country takes no steps to reduce its surplus – for example, by increasing its domestic investment and consumption – the only way the deficit country can reduce its deficit is by cutting its own investment and consumption. But this would produce a "bad" equilibrium, achieved by stagnation.

Something like this seems to have happened in the eurozone. Germany has retained its "good" surplus, whereas the Mediterranean countries slashed their deficits by cutting investment, consumption, and imports. Greece's unemployment rate soared to nearly 27%, Spain's is almost as high, and Portugal faces a banking crisis.

In November 2013 Paul Krugman wrote that, "Germany's failure to adjust magnified the cost of austerity". Though it "was inevitable that Spain would face lean years as it learned to live within its means", Krugman argued, "Germany's immovability was an important contributor to Spain's pain".

But Germany rejected this logic. Its current-account surplus was its just reward for hard work. Indeed, according to the German finance ministry, the surplus is "no cause for concern, neither for Germany, nor for the eurozone, or the global economy". Because no "correction" was needed, it was up to the deficit countries to adjust by tightening their belts.

John Maynard Keynes pointed out the deflationary consequence of this attitude in 1941. Deficit countries with a fixed exchange rate (as is the case in the eurozone) are forced to cut their spending, while surplus countries are under no equivalent pressure to increase theirs. Keynes's proposed solution to this problem was an international payments system that would force symmetric adjustment on both surplus and deficit countries. Persistent surpluses and deficits would be taxed at an escalating rate. His plan was rejected.

Of course, a creditor country can always help a debtor by investing its surplus there. Germany is willing to do this in principle, but insists that austerity must come first. The problem is that stagnation ruins investment prospects. China has shown that voluntary adjustment by a surplus country is possible. Until recently, the global imbalances problem was centred on China's bilateral surplus with the US. China used its excess savings to buy US Treasury bonds, which drove down world interest rates and enabled cheap borrowing, permitting America to run a vast current-account deficit. The main impact of low interest rates, however, was to fuel the housing bubble that burst in 2007, leading directly to the 2008 financial crisis. Since then, China has made great efforts to reduce its external surplus. At its peak of 10.1% of GDP in 2007, the surplus was larger than Germany's; by the end of 2013, it had plummeted to 2% of GDP. Why was China willing to adjust while Germany is not? Perhaps a key difference lies in the fact that Germany has significant political clout over the deficit countries with which it trades. Germany was effectively able to force austerity upon its neighbours. That raises an important issue regarding the legitimacy of austerity. Its main proponents are creditors, who have much to gain from it (relative to the alternative of raising domestic wages and forgiving debts). Creditor-debtor conflicts have always been the stuff of monetary politics, and the persistence of austerity has set the stage for a new debtors' revolt.

So we will have to rely on Draghi and quantitative easing to save the euro from Germany. Money will have to fall from the proverbial helicopter before Germany shows any willingness to reduce its surplus.

• Robert Skidelsky, a member of the House of Lords, is professor emeritus of political economy at Warwick University

On 16 July 2014, the Supreme Court provided clarity on the nature of a principal’s entitlement to recovery of a secret commission or bribe received by an agent.  The court ruled that when an agent acquires a benefit as a result of his fiduciary position, including a secret commission or bribe, he is to be treated as having acquired the benefit on behalf of his principal and so holds it on trust for the principal.  The ruling is significant in the context of insolvency, as the effect of the decision is to give a principal a preferential claim over the assets of his agent, as against an unsecured creditor.  It also permits the principal to trace the bribe into the hands of others (where they are not bona fide purchasers), which can be crucial where the agent has dissipated his assets.  This ruling confirms a principle which has, to date, been treated inconsistently by the courts since the nineteenth century.

Facts of the case : In December 2004, FHR European Ventures LLP (FHR) purchased the issued share capital of the Monte Carlo Grand Hotel SAM from Monte Carlo Grand Hotel Ltd (the Seller).  Cedar Capital Partners LLC (Cedar) were consultants who acted as FHR’s agent in negotiating the purchase of the hotel.  However, Cedar had also entered into an “Exclusive Brokerage Agreement” (Agreement) with the Seller, under which Cedar received a €10m fee on conclusion of the sale and purchase of the hotel in or around January 2005.

In November 2009, the claimants brought proceedings to recover the €10m fee from Cedar on the basis that they had failed to disclose the Agreement to the claimants and breached their fiduciary duties.  The claim was successful at first instance, but the judge refused to give the claimants a proprietary remedy in respect of the monies (which would otherwise have put the claimants in a favorable position over unsecured creditors in the event of insolvency).  Instead, FHR was held to have a personal claim against the agent.

The Court of Appeal granted the claimants’ appeal on this point and made a declaration that Cedar received the €10m fee on constructive trust for the claimants and so was entitled to a proprietary remedy.  This decision has now been upheld by the Supreme Court.

The argument focused on the limits of the application of a rule of equity that an agent who acquires a benefit as a result of his fiduciary position or pursuant to an opportunity resulting from his fiduciary position, is to be treated as holding that benefit on behalf of, and so on trust for, the principal. If the rule applied in the context of a bribe or secret commission, it would give the principal a proprietary claim to the bribe as well as a personal claim against the agent; if not, the principal would have only a personal claim against the agent. Cedar argued that the claimants should not be entitled to a proprietary remedy in such a case, on the basis that a bribe or secret commission was always intended to be made to the agent, not his principal; it was never the principal’s property.  Accordingly, it would be wrong to assume a constructive trust and there should be an exception to the equitable rule to that extent.  FHR argued that the equitable rule should apply, on the basis that equity does not permit an agent to rely on their own wrong to justify retaining a benefit received as a result.    Lord Neuberger, who delivered the judgment, reviewed the conflicting authorities and concluded that it was not possible to decide the case on the basis of clear legal authority and so it was necessary to consider the matter from the perspective of principle and practicality.  He considered Cedar’s argument to be the more complicated to justify and also unattractive, given that in a situation where the agent receives a bribe or secret commission from a third party, there would be a strong possibility that that payment would disadvantage the principal.  Looking at the facts of the case, Lord Neuberger considered that had the Sellers not paid the €10m to Cedar, it may have accepted a reduced price to reflect the fact it did not have to pay the large fee to the consultant.  Furthermore, given the heightened awareness and concern about bribery, the Supreme Court said that it expected “the law to be particularly stringent in relation to a claim against an agent who has received a bribe or secret commission” (at paragraph 42).

FHR’s arguments had the merit of simplicity and were consistent with the fundamental principles of the law of agency.  They were also consistent with the position in other common law jurisdictions, namely Australia, New Zealand, Singapore, Canada and the US.  It also seemed curious that if Cedar’s arguments were preferred, this could have the effect that a principal whose agent wrongly accepted a bribe would be worse off (in terms of recovery) than where the principal had obtained a benefit “in far less opprobrious circumstances” (at paragraph 41).

Accordingly, the Supreme Court favored the claimant’s argument, concluding that “there is no plainly right answer, and, accordingly, in the absence of any other good reason, it would seem right to opt for the simple answer” (at paragraph 35).  This decision provides a welcome clarification of the position of the status of bribes and secret commissions paid to agents.  It provides a departure from the jurisprudential differentiation between different types of benefits that an agent may receive in breach of his duties that had occupied the minds of lawyers and their textbooks for many years.  The judgment is likely to have a significant impact on cases where the agent in question has dissipated his assets or has become insolvent, such that the principal may not otherwise have been able to (1) recover the full amount of the bribe or secret commission from the remaining assets when other creditors are taken into account and/or (2) trace the funds into the hands of non-bona fide purchasers.  Of course, where a principal seeks to recover what is, in effect, a bribe paid to the agent, this may create other issues for the principal to grapple with, not least the money laundering provisions in the proceeds of crime legislation.  If not carefully considered and complied with, the principal may find himself committing a criminal offence by recovering “criminal property”.

Case reference: FHR European Ventures LLP and Others (Respondents) v Cedar Capital Partners LLC (Appellant) [2014] UKSC 45