THIS week, a New York court threatened to prevent an Irish bank from selling assets, because it would prejudice an American hedge fund. Expect to see more of this should euro-zone bank insolvencies create cross-border claims.

Fir Tree Capital, a hedge fund which owns $200m of subordinated Anglo Irish bank bonds, is trying to block the bank’s attempts to dispose of its last remaining US assets, unless it repays its debt. The backdrop is a law passed by the Irish government in December granting the government sweeping powers to restructure the junior debt of state-rescued banks. Essentially the law allows Ireland’s banks to default on junior debt if the Irish Finance Minister approves.

The law passed its first test in April when the Irish High Court rubber-stamped a Finance Ministry backed plan for Allied Irish to indefinitely suspend coupon payments on subordinated bonds and not redeem them on maturity. But what if the subordinated bondholders are not Irish, and their bond contracts are not governed by Irish law? After all many banks and even governments issue debt under English or New York law precisely to reassure creditors they are protected in the event of default.

One of the most striking clauses in the Irish legislation allows the government to “modify the applicable law” of a bond contract. The Irish government could change its banks’ bond contracts to prevent bank creditors suing in foreign courts, blocking at the source cases like Fir Tree’s against Anglo Irish.

via Cross-border litigation: A sign of things to come? | The Economist.