Government Debt as Property

I remember having this conversation with a colleague in the Faculty Club once: What is the difference between the Government writing off the value of all debt, and the Government writing off the value of its own debt. (Said colleague argued for the former, but I insisted it would be a violation of art. 1 P1 to do so. Hence the question: What's the difference?)

This issue has become relevant once again now that some Hedge Funds are apparently threatening to sue Greece if it unilaterally forces certain debt holders to take losses. Cf. yesterday's NY Times. I continue to be of the opinion, though, that the will not succeed. (Or at least that they should not.)

Article 1 of the First Protocol says:

Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.

The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.

My argument at the time rested on the distinction between the government acting as legislator and the government acting as counterparty. (Notice the effortless switching between my persona as jurist and my persona as (financial) economist.) In my opinion, art. 1P1 does not protect bondholders from normal counterparty risk anymore than it does for strictly private bonds. To say otherwise would require the conclusion that Bankruptcy Acts are in violation of the Convention. The fact that in this case Greece is considering forcing the issue by enacting a statute is irrelevant. If you buy a government bond, you assume a measure of counterparty risk of exactly the nature that is at display here.

If I were representing the plaintiffs in this case, there is one aspect that I would emphasise that might cause the ECtHR to come to a different conclusion: All the arrangements that have been proposed for Greece violate the principle of equality of bondholders by asking the private bondholders - and only the private bondholders - to take a "haircut". If the Court of Human Rights were so inclined, it could hold that a discrimination of such a nature violates art. 1P1. I am not aware of a precedent either way. However, given the sensitivity of the issue, I would be highly surprised if they did so. Maybe at another time, but not now, not here.