Europe’s Rescue Fund Drops English Law For Bonds, Citing Brexit

(Bloomberg) -- The euro-area’s bailout fund will start using Luxembourg law to govern its debt rather than English law, the latest blow dealt by Brexit to the U.K.’s financial industry.

The European Stability Mechanism will start adopting Luxembourg law for all its euro-denominated bonds and bills starting Oct. 1, according to an investor newsletter Thursday. Dollar-denominated debt will continue to be issued under English law.

“Brexit contributed to our thought process for making a move to Luxembourg law from English law,” said Kalin Anev Janse, chief financial officer at the ESM, which raises money to fund sovereign rescues in the euro area.

With a matter of weeks before the U.K. potentially crashes out of the European Union without a deal, London’s dominance as a financial center is increasingly under threat.

English law has long been one of the dominant governing laws for the global bond market and investors favor its objectivity in debt restructurings. The switch by a major sovereign issuer may prompt other European borrowers to follow suit.

The ESM plans to sell about 10 billion euros ($11 billion) of securities this year, including 3.5 billion euros in the fourth quarter after the switch takes effect.

“Ultimately this was a business decision, met with wide investor and bank support, and it demonstrates strength of the European capital markets union,” said Anev Janse, referring to a European Union initiative which aims to further integrate capital markets across member states.

Some borrowers have already come under pressure to use euro-zone governing law because of Brexit. Last year Elke Koenig, head of the euro area’s bank-failure agency warned that bonds issued by euro-zone lenders under English law will become “third-country issues.”

About 100 billion euros of securities could lose their loss-absorbing status, the Single Resolution Board said at the time.

It’s not the only market where English law is under threat. Brexit also risks disrupting the $544 trillion market for over-the-counter derivatives if it eliminates automatic recognition of English court judgments across the EU. Last year the International Swaps & Derivatives Association published new master agreements that govern the swaps under Irish and French law, aiming to make it easier to settle contractual disputes after the split.

To contact the reporter on this story: Katie Linsell in London at klinsell@bloomberg.net

To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Chris Vellacott

©2019 Bloomberg L.P.