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The surprising (to me) result of the Irish bailout is the related agreement by EU leaders to force bond-holders to face a haircut should an EU state become “insolvent” after 2013. I think this was done in an effort to placate the many voices that are saying “no” to the state bailouts. It sounds as if the leaders are responding: “We will fix this problem now, but in the future will let the chips fall on the bondholders back.”

That may sound like a reasonable approach. I see some unintended consequences. From the WSJ:

Creditors of euro-zone countries that face insolvency after 2013 will see their bond holdings restructured.

Okay, we get that. After 2013 holders of bonds of troubled countries get hit. But what happens between now and 2013? Again from the Journal:

Ms. Merkel has stressed in that the proposal would affect only bonds issued from late 2013.

Wait a second. If bonds issued after late 2013 are at risk, does that mean that bonds issued before 2013 are not at risk? That sure is what it sounds like to me.

The bond market is going to call this bluff. There are Greek, Irish and Spanish bonds that are trading at 9%, 7% and 5% respectively that are the buy of a lifetime if I am reading this right. Who wouldn’t want to buy a nice 9%, ten-year Greek bond that was also guaranteed as to payment by the big hitters of the EU? A “fully” guaranteed bond would trade closer to 3% than 9%.

So I am left confused by this development. Other questions:
  • If the “at risk” provisions for all existing EU sovereign debt is somehow eliminated you have to ask; who is making the promise that all that debt is money good? The ECB? I would think not. We are talking of a few trillion Euros if you add in Spain and Italy. You need a big stick to guarantee that nut.
  • What the hell is going to happen in 2013? By setting a “date certain” situation where the status of a borrower changes from one day to the next is just begging for a crisis. Depending on the circumstances one of the countries could be blocked out of the credit market overnight. This plan is a set-up for failure, not success.
It’s possible that I (and the Journal) are reading this wrong. We shall see. It will show up in bond prices and CDS spreads. This could also be something that later gets clarified. That will be interesting. The headline for that might be:
Merkel Changes Direction
“Current Debt Not Secure”
I think the EU finance ministers botched this up by including the, “Drop Dead In the Future” policy. The market will provide it’s own vote. There may be a knee jerk up move for the Euro. Relief? I don’t like this development. I would fade any rally.


Source: Irish Bailout: Drop Dead in the Future...So What About Today?