Friday, March 2, 2012

The EIB now wants to be senior like the ECB; private bond holders don't stand a chance in subordination circus

One could potentially make a case for the ECB subordinating private bond holders of sovereign bonds. After all the central bank is not an investor, it buys bonds to implement its monetary policy. It's a weak case, but private investors could come to grips with it. But once that door is opened, another set of EU institutions will also quickly become "more equal than others". Out of the woodwork comes the European Investment Bank (EIB) with substantial Greek bond holdings. And that institution also wants to be senior to private bond holders.
Bloomberg: The EIB lends to major infrastructure projects in the EU and beyond. It has shareholder equity of about 41 billion euros and only about 0.1 percent of its loan book is impaired. It has traditionally held privileged creditor status, meaning it’s repaid before other lenders, according to Standard and Poor's.

The EIB owns more than 100 million euros and less than 1 billion euros of Greek bonds, said one of the regional officials, who declined to be identified because the deal to exempt the lender from losses on the notes isn’t public.
Of course, at this stage any institution that has an EU public affiliation and owns sovereign bonds will try to become pari passu with the ECB. Why not. It's free for all in subordinating private bond holders.
Bloomberg:  Investors are complaining that the European Investment Bank doesn’t deserve the same exemption from losses on its Greek bond holdings as the euro region’s central bank because it didn’t buy the notes to support monetary policy.
“They really are stretching it a bit, bailing out poor treasury management more than anything else,” said Brian Barry, a strategist at Investec Bank Plc in London. “There must be plenty of jealous treasury departments out there.”

Rainer Schlitt, a spokesman for the EIB in Luxembourg, didn’t immediately reply to an e-mail seeking comment.
And don't forget that Greece also issued some bonds in yen, the so called Samurai bonds. Of course there will be other "public" institutions holding the Samurai bonds who will not want to take losses as well.
Bloomberg:  Some holders of the nation’s yen-denominated Samurai bonds may also avoid losses in the debt restructuring, according to a statement from Shinsei Bank Ltd.
Sovereign bond investors don't stand a chance going forward. With ESM in place and numerous other public EU institutions buying this debt, the Eurozone debt is now basically a CDO with a senior and a junior tranche.

What makes this market particularly dysfunctional is the fact that nobody will know how "thick" the senior tranche is until a default occurs. There is no transparency with regard to which institutions holds which bonds and how much. There is also no rule of law to delineate who qualifies to be in the special club with the ECB.
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