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ECB Crisis Legal Logjam Prompts Plea for Time in Lawsuit

ECB Crisis Legal Logjam Prompts Plea for Time in Investor Suit
The ECB is being sued by more than 200 Italian retail investors who claim it’s unfair the central bank avoided losses on Greek debt that private sector bondholders had to endure in a restructuring earlier this year. Photographer: Hannelore Foerster/Bloomberg

The European Central Bank’s chief legal counsel told a European court that officials need more time to respond to an investor lawsuit because of management upheavals and crisis-related work, according to a letter obtained by Bloomberg News.

The Frankfurt-based central bank’s Executive Board faces “unprecedented reorganization,” ECB Director General of Legal Services Antonio Sainz de Vicuna wrote in the letter dated July 11. Also, its legal resources “are being put through severe test as a result of the dramatic worsening of the sovereign debt crisis and of tensions on international markets, with direct implications for the ordinary functions of the ECB.”

The ECB is being sued by more than 200 Italian retail investors who claim it’s unfair the central bank avoided losses on Greek debt that private sector bondholders had to endure in a restructuring earlier this year.

De Vicuna’s plea to the Luxembourg-based European Union General Court underscores the strain on the ECB’s legal services as the crisis imposes unprecedented demands on the central bank. The remarks also cite the fallout from an overhaul of President Mario Draghi’s Executive Board over the past year. More may be imminent as Luxembourg’s Yves Mersch awaits the outcome of wrangling with European lawmakers on his board appointment.

The letter shows “that the ECB and its legal department are completely overwhelmed,” said Professor Charlotte Gaitanides, a lawyer and head of European Studies at the University of Flensburg in Germany. “If they can’t cope now, what is it going to be like once the ECB is put in charge of the banking union?”

Greek Losses

In De Vicuna’s letter to Emmanuel Coulon, registrar of the EU’s second-highest court, he asked for a four-month reprieve to respond to a lawsuit from Italian retail investors. They complain that a principle of equal treatment was breached by the ECB’s avoidance of losses on 45 billion-euro ($58 billion) in Greek government debt holdings, while other bondholders endured writedowns in the biggest debt restructuring in history.

An ECB spokeswoman confirmed the authenticity of the letter. She said the central bank fully respects judicial independence and refrains from commenting on any cases to which it is a party.

The lawsuit against the ECB may not succeed as it can be hard to prove damages caused to individual investors, said Hubert de Vauplane, a partner at Kramer Levin Naftalis & Frankel LLP in Paris. It could still encourage large financial institutions to pursue their own actions against the ECB, he said.

First Claim

“This is the first claim of this kind and opens the doors for other investors,” de Vauplane said in an interview. “Asset managers and banks have been asking law firms if there are ways to sue European Union authorities over the debt swap.”

That would add to the burden on ECB lawyers who de Vicuna says are already stretched. He cited workload connected to the ECB’s involvement in supervising bailed-out euro area nations “where significant legislative measures need to be prepared, monitored and assessed,” as well as measures to enhance the euro area’s financial stability.

De Vicuna said the ECB’s input into EU President Herman Van Rompuy’s initiative to enhance European economic and monetary union is also taking up resources. An interim report is required next month and a final one before the end of 2012, he said.

Legal Load

Further work accumulating for the central bank’s lawyers includes determining and drafting its potential role in the supervision of Europe’s banks. Staff are now also tasked with examining whether the ECB’s new unlimited government bond purchasing program violates EU treaties, Germany’s Bild Zeitung reported Sept. 25.

De Vicuna’s plea also cites changes in the ECB’s six-member Executive Board in the past year, during which time Draghi was appointed along with three other officials. A fifth post has been vacant since May and the appointment of Mersch, the Luxembourg central bank governor, to that job is being held up by a European Parliament protest over the lack of top female officials at the bank.

Joerg Asmussen has been the board member in charge of legal services since he joined in January after Lorenzo Bini Smaghi left. He also manages the ECB’s role in so-called Troika missions to bailed-out nations with the European Commission and the International Monetary Fund.

Mersch Portfolio

Draghi will have the option to transfer the legal portfolio to Mersch, a lawyer by training, which would be the second management change for that division in less than a year.

“Recently appointed members of the Executive Board need enough time to form their own opinions about the most appropriate reaction by the ECB to the arguments of the applicant, in consideration of past and future policies” relevant to the dispute, de Vicuna wrote.

Flensburg University’s Gaitanides suggested that the strain on ECB lawyers might harm the functioning of the institution at a crucial time.

“One could argue that the legal department is merely part of the ECB’s administrative framework that should just serve the central bank’s economic objectives,” she said. “However, if it doesn’t function properly that has far wider ramifications.”

The case is: T-224/12, Accorinti and Others v. ECB.

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