“The European Central Bank’s willingness to ride roughshod over bondholder rights risks pushing up borrowing costs for indebted governments by making investors less willing to lend.
The ECB swapped about 50 billion euros ($67 billion) of Greek bonds for new securities, identical to the old ones in every way save for identification numbers. The switch makes the ECB senior to other investors, exempting it from the largest sovereign restructuring in history as Greece rewrites the terms of its notes to ensure lenders forgive 53.5 percent of the debt.
“Bondholders are effectively being subordinated every time the ECB gets involved — not legally, but economically,” said Saul Doctor, a credit strategist at JPMorgan Chase & Co. in London. “Foreign investors are going to be less willing to buy sovereign bonds when the ECB can exert itself.”
The ECB has immunity to the losses imposed by the bond-swap plan, designed to trim Greece’s debt burden by 106 billion euros and enforced by the threat of retroactive collective action clauses that prevent holdouts. Greek 10-year yields are almost 35 percent, valuing the securities at 20 percent of par, after Standard & Poor’s yesterday cut the nation’s debt rating to “selective default.”
“They’ve thrown away the rulebook of crisis resolution,” said Gabriel Sterne, an economist at London-based brokerage Exotix Ltd. “It’s a cynical move that will affect the world for years to come and they did it because they can get away with it. It’ll push up costs for other stressed sovereigns so they’re shooting themselves in the foot.”
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More proof that politicians will always take the easy road out. Baring massive global growth via technological innovation, there is no way this doesn’t end badly for the ECB.
Part of me (only part) wishes we lived in a world where financial institutions had the resources to take this stuff head on and hold governments/political bodies responsible for their actions, instead of mere lobbying them.
You want to throw the rule book away? We’ll buy up all the outstanding Greek CDS and see you in court.
Only part of me wishes for that. Clearly no one saw this coming or else something would have been done already and if precedence is set here it might not matter in the future.