We live interesting times, here in old Europe.
The recent decision by the ECB to convert the Greek bonds it owns into new securities, issued in 2012 and so excluded from the debt swap offer, created an interesting new category: 'The More Equal Than Others bondholder'.
A dangerous precedent, as many commenters noticed, including PIMCO on its twitter feed:
If we were talking about shares of a listed company, this situation could be compared to an institutional investors with the capacity to convert its holding into preferred shares, just in case of bankruptcy, and telling you only before the Chapter 11 filing.
It takes just a bit of later thinking to realize that this is exactly the kind of institutional investor you do not want to see in a filing of a company you own. Any time the ECB buys sovereign securities to "support" their price, it is really reducing the potential recovery rate for" Joe average investor", in a worst case scenario - and Greece proved it may happen.
Moody's just came out with an interesting chart offering us a nice summary (and analysis) of the ECB's major holdings:
For countries such as Spain and Italy, where the ECB holds a relatively small proportion of their outstanding debt, it could cause some marginal increase in funding costs, but is unlikely to be significant.
However, as shown in the exhibit above, the ECB holds a significant proportion of the outstanding debt of Greece, Ireland, and Portugal, and the subordination of private sector creditors may make it more difficult to re-access the markets once their existing support programmes run out in 2013. This is a credit negative factor that we have already reflected in recent sovereign rating actions, including those announced on 13 February.
The table contains the usual suspects: Ireland, Portugal, Spain and Italy. Each country with its own reasons to belong to this list and is at different stages of their restructuring efforts, but all of them share one big problem in common: major shareholders whose credibility is viewed negatively. Will they be strong enough to deal with this additional complication?
Disclosure: I own Italian bonds in my portfolio