Thursday October 30, 2014 Search
Weather | Athens
19o C
12o C
News
Business
Comment
Life
Sports
Community
Survival Guide
Greek Edition
Post-Greece writedowns risk two-tier bond market

By Lucy Meakin

Bond changes triggered by Greece’s debt restructuring risk creating a two-tier market as investors avoid securities that adopt so-called collective action clauses to guard against potential losses in future writedowns.

Governments will be forced to include the clauses in a percentage of their euro bond sales starting in January as part of the agreement to establish a permanent rescue fund for the currency union. Bonds issued under the new documentation may be less valuable, according to Pacific Investment Management Co., which oversees the world’s biggest bond fund.

“The collective action clause bonds should trade at a marginal discount versus the ones that don’t have them because you have the scenario in which the ones which take the haircut are the ones with the CACs and not the others,” said Lorenzo Pagani, head of Pimco’s European government bond and rates desk in Frankfurt. Pimco managed $1.9 trillion of assets at the end of September.

CACs allow a majority of bond investors to approve a debt restructuring, removing the right for solitary investors to veto a rescheduling for their own holdings. Greece introduced the provisions retroactively on its debt earlier this year to impose losses of 53.5 percent on private investors who wanted to opt out of the nation’s plan to reduce its debt burden.

Greek 10-year bond yields have dropped about 26 percentage points since the debt swap in March. The yield was 17.97 percent today, with the price at 30.86 percent of face value. That’s down from a record high of 44.21 percent on March 9.

Investor confidence in the sovereign issuing the debt may exaggerate the price difference due the relative risk of a default or writedown, according to Commerzbank AG.

“For the stronger, more liquid assets it doesn’t make a big difference at all,” said Rainer Guntermann, a Frankfurt- based fixed-income analyst at Commerzbank. The greater potential risk of a credit event “would be an argument in our point of view for a somewhat more visible discount on longer-term bonds for weaker credits like Spain and other peripheral countries,” he said.

Greece lost its last investment grade rating almost two months before the nation agreed in March to the largest sovereign restructuring in history. Spain’s credit rating has come under pressure as its borrowing costs rose to euro-era records, leading to speculation the nation’s debt load may be unsustainable. Spain’s Prime Minister Mariano Rajoy is so far resisting pressure from European counterparts to seek aid.

Moody’s Investors Service assigned a negative outlook on Spain’s Baa3 credit rating, which is one level above non- investment grade, on Oct. 16. The nation lost its top Aaa level as recently as September 2010. Standard & Poor’s also has a negative outlook on its BBB- ranking and so does Fitch Ratings.

The price difference on shorter-maturity bonds may be less pronounced because of the relatively small number of securities containing CACs, Commerzbank’s Guntermann said.

Under terms of the European Stability Mechanism, CACs need only be applied on debt of maturities greater than one year and the percentage of bonds issued that must contain CACs is scaled over time. Sovereigns may choose to apply them to more or all of their issuance, as opposed to just the required amount.

The inclusion may make the bonds more attractive to investors, according to Helen Haworth, head of European Interest Rate Strategy at Credit Suisse Group AG in London.

“Naturally you might think the ones with the CACs might be worse to hold,” she said. “I actually think the opposite is true. As a bondholder, you have slightly more rights with collective action clauses. If there’s no collective action clauses in the bonds, the question is if they then do a restructuring, do they just introduce them retroactively like they did for Greece or not?”

Greece achieved a 96.9 percent participation rate in its 206 billion-euro ($262 billion) bond exchange after the government legislated to insert CACs into notes governed by Greek law retroactively.

While a price difference between the type of bond remains a likely scenario, the possibility of other distressed nations following the Greek example could remove any benefit of holding either type, Pimco’s Pagani said.

“When bonds are governed by domestic law there is the possibility to introduce CACs retroactively,” he said. “In that case, the difference in value between new-CAC bonds and old no-CAC bonds disappears.”

[Bloomberg]

ekathimerini.com , Monday November 12, 2012 (11:10)  
Italy, Greece banks lead Europe decliners amid capital concerns
European stocks tumble as banks decline after Enria’s comments
Germany’s bonds rise as consumer prices decline in six states
Peripheral banks lead European shares lower after positive start
Germany denies backing proposal for Greece to exit aid program
Germany denied it’s given support to proposals that would help Greece exit its bailout early, dealing a blow to a plan that’s already unnerved investors in the nation’s debt. The German gove...
Boy, 13, dies after falling from fifth floor in Thessaloniki
A 13-year-old boy died of his injuries after falling from the fifth floor of a building in the northern port of Thessaloniki on Thursday. Early witness reports suggested the youngster was al...
Inside News
BASKETBALL
Panathinaikos and PAOK retain perfect record
The third round of games in the Basket League over the weekend saw PAOK overcome the strong resistance of host KAOD at Drama, and Panathinaikos and Olympiakos inflict heavy losses on AEK and...
SOCCER
Gattuso recalls resignation from OFI bench
Gennaro Gattuso has recalled his resignation from the OFI Crete bench following pressure by the club’s fans and administration, one day after his quitting accusing the club and its players o...
Inside Sports
COMMENTARY
Time is running out in Afghanistan
Thirteen years after the attacks on the Twin Towers and NATO's entry into the war in Afghanistan, things remain pretty much unchanged: Political instability and insecurity  reign in the Cent...
COMMENTARY
Cool heads required
It’s time for Athens and Nicosia to deal with the current situation in Cyprus’s Exclusive Economic Zone (EEZ), which a Turkish seismic research vessel has breached against international law,...
Inside Comment
SPONSORED LINK: FinanzNachrichten.de
SPONSORED LINK: BestPrice.gr
 RECENT NEWS
1. Germany denies backing proposal for Greece to exit aid program
2. Boy, 13, dies after falling from fifth floor in Thessaloniki
3. Italy, Greece banks lead Europe decliners amid capital concerns
4. Civil servants to be investigated for transferring money abroad
5. European stocks tumble as banks decline after Enria’s comments
6. Tsipras to meet with BoG governor on Thursday
more news
Today
This Week
1. Greek euro dilemma is back as minister predicts volatility
2. Students hijack university senate meeting
3. Clientelism belongs to the past, says Mitsotakis
4. Peripheral banks lead European shares lower after positive start
5. Over 1,500 buildings and vehicles damaged in flash floods
6. Tsipras to meet with BoG governor on Thursday
Today
This Week
1. At least 11 banks to fail European stress tests, three in Greece, report says
2. Austria’s creative bookkeeping beats Greece on secret debts
3. Cyprus to block Turkey's EU talks after EEZ violation
4. End of reason, end of humanity
5. Clean bill of health for Greek banks from stress tests
6. Samaras pledges action after flash floods in Athens
   Find us ...
  ... on
Twitter
     ... on Facebook   
About us  |  Subscriptions  |  Advertising  |  Contact us  |  Athens Plus  |  RSS  |   
Copyright © 2014, H KAΘHMEPINH All Rights Reserved.