Realities and Priorities of Portugal's Debt Management, Pt. III Commentary
Realities and Priorities of Portugal's Debt Management, Pt. III
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JURIST Guest Columnist Martinho Lucas Pires is a LL.M. Candidate at the Católica Global School of Law, a Lisbon-based faculty of the Catholic University of Portugal. In the third entry of a four-part series on the realities and priorities of Portuguese sovereign debt management, Pires examines the constitutional dimension of a Portuguese debt restructuring, concluding that bondholders would unlikely succeed as litigants in a Portuguese court…


The European debt crisis reached a new stage with Greece’s restructuring, hailed a success for its mass creditor participation. The process of changing payment conditions through national law is a novel weapon for countries facing huge financial crises. As a possible counterstrike to modifications, private bondholders may have the possibility of litigating against the state in its own courts. If Portugal follows Greece in a debt re-structuring, will its creditors have domestic litigation options?

For an answer, one must analyze the constitutional limits to a change in payment terms of local law bonds. The lesser degree to which the constitutional option is feasible for potential litigants, the higher the Portuguese state’s bargaining power becomes in an eventual involuntary debt restructuring. In the event of a sovereign debt restructuring, bondholders’ subjective positions towards their debtor would be greatly effected by a change in the payment terms. In order to defend their position, they would likely look to constitutional protections in order to argue that the state is not acting within its legitimate authority. In order to consider a violation of constitutional rights, the courts would balance the interest of the individual with the interest furthered by the state.

So, one must look to the Portuguese Constitution [PDF] and to the jurisprudence of the Portuguese Constitutional Court. The problem is that Portugal has never faced a situation of this kind. Since there is a gap between theory and practice, the best possible approach is to look at the principles and rights that are likely be at stake to see if there is any possibility, through known theoretical and practical means, to invalidate a retroactive change to payment terms. One principle and one right stand to be effected: the principle of trust and legal certainty, and the right to property.

The principle of trust and legal certainty is specifically encompassed by Article 2 of the Constitution of the Portuguese Republic, which states:

The Portuguese Republic is a democratic state based on the rule of law, the sovereignty of the people, plural democratic expression and political organisation, respect for and the guarantee of the effective implementation of the fundamental rights and freedoms, and the separation and interdependence of powers, with a view to achieving economic, social and cultural democracy and deepening participatory democracy.

The institutions of the state must be consistent with and subject to certain transparent decision-making processes, in order to limit official arbitrariness. But this principle has to be developed side by side with the freedom of action of the legislator to conform the country’s legal reality to its public needs. In other words, some situations deemed to be of sufficient public importance might give the legislator the power to change a certain reality retroactively.

On the other hand, the right to property is expressed in Article 62, which also states the limits of expropriation:

1. Everyone is guaranteed the right to private property and to the transmission thereof in life or upon death, in accordance with the Constitution.
2. Requisitions and expropriations in the public interest may only be undertaken on a legal basis and upon payment of just compensation.

According to Justice Joaquim de Sousa Ribeiro’s study of the Constitutional Court’s jurisprudence on the right to property, and as demonstrated by Decision 148/2004 and 260/2004 of the Portuguese Constitutional Court, the right to property is located at the confluence of economic and fundamental rights conferred by the Constitution, which requires that it be considered together with and balanced with other rights of the collective. Thus, the right to property is not an absolute. The jurisprudence of the Court is also very restrictive on the application of the right to property to safeguard creditors’ rights, having decided that in cases of expropriation the Constitution requires only reasonably fair or acceptable compensation.

With this in mind, there is a strong possibility that, in the event of a debt restructuring, Portugal’s parliament would have the capacity to pass a law altering the payment terms of the bonds. This modification would most likely involve an appeal to public interest, which is to say that it would be an attempt to ameliorate the situation and avoid something worse: a “public calamity” or a threat to the normal stability of the “constitutional and democratic order.” In other words, the state would be protecting itself from failure. Furthermore, the principle of trust is not likely to impede this action, as the Portuguese Constitution does not forbid the use of retroactive laws in the field of economic rights, and among those rights is the right to property. As previously stated, the right to property has to be balanced with other public interests. And as the measure would be taken in light of the country’s need to restructure to avoid default, which would certainly imperil the nation’s ordre public, it would likely be found to be justified. It is also likely that the Constitutional Court, upon balancing both situations, would come out in favor of the state.

To summarize, the Portuguese state has a strong bargaining tool in that national courts would not likely stand in the way of a debt restructuring à la Grecque. Even if litigation occurs, it is highly unlikely that the rights of bondholders would prevail against the Portuguese state’s duty to maintain public order.

Martinho Lucas Pires holds a Diploma in Law from the Catholic University of Portugal, where he specializes in EU and comparative public law. He also holds a M.Sc. in Film Studies from the University of Edinburgh, and recently co-founded My Social Project, a Portuguese NGO.

Suggested citation: Martinho Lucas Pires, Realities and Priorities of Portugal’s Debt Management, Pt. III, JURIST – Dateline, Apr. 5, 2012, http://jurist.org/dateline/2012/04/martinho-lucas-pires-portugal-debt.php.


This article was prepared for publication by Megan McKee, the head of JURIST’s student commentary service. Please direct any questions or comments to her at studentcommentary@jurist.org


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