The EU Gives a Lesson in How Not to Restructure Sovereign Debt
Interest-Rates / Eurozone Debt Crisis Jan 25, 2012 - 02:48 AM GMTBy: David_Urban
Debt yields appear to be coming off with the exception of Greece, where the EU is now attempting to strong arm creditors once again with respect to the interest rate on the New Greek debt.
What the EU failed to realize is in that their rush to rescue the banking sector and bail out Greece they have created a bifurcated market in European sovereign debt. The Greek bailout will only apply to private holders of Greek debt, excluding pension funds, the EU and IMF from the bailout.
In doing so they have stated that their holdings will be subordinated to the private sector and European sovereign debt sold at auction is not the same across the board despite what is written in prospectuses.
No wonder EU banks redeposited the cash they borrowed from the ECB. What is the risk profile on EU sovereign debt if they are not going to be treated pari-passu with the pension funds, EU, and IMF?
As the Greek fire slowly burns, Portugal is ready to explode in the second quarter, while protests in Hungary and Romania begin to smolder and French elections take center stage.
In short, the smoldering fires across Europe threaten to escalate into out of control fires in the second quarter unless the EU comes to grips with the enormity of the crisis.
A simple default on the backs of the banks and hedge funds will not solve the problems facing the continent. Buying time is no longer an option.
When is a 6% EU sovereign bond not a 6% EU sovereign bond?
When the bond is owned by the EU, IMF, or pension funds.
By David Urban
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