So the European Stability Mechanism will rank senior to other bondholders, but not explicitly so:
May 18 (Bloomberg) –The euro area’s planned permanent debt-crisis mechanism will probably refrain from detailing its seniority status in lending contracts, following the practice of the International Monetary Fund, said the head of Europe’s temporary rescue facility. Klaus Regling said a political commitment exists in Europe to let the future entity, the European Stability Mechanism, “claim seniority just below the level of the IMF seniority but above everybody else.”
It rather puts one in mind of the ESM’s predecessor — the European Financial Stability Facility. The EFSF had its first outing earlier this year when it teamed up with the IMF to bail-out Ireland.
Effective seniority of the ESM is a big deal for markets, and a deal that’s growing by the day. Société Générale’s rates team figures the IMF, EU and the European Central Bank (by virtue of its peripheral bond purchase programme) will hold nearly €190bn of Greek loans and bonds by the end of next year. Private (subordinate) investors, however, will have just €180bn of Hellenic debt and loans.
All of which means the available cushion (cannon fodder?) of subordinate claims is getting smaller.
Or as SocGen put it:
So at the end 2012, the European taxpayer becomes the dominant risk taker on Greece, and the ever more senior one. Any haircutting of investors thereafter will have to be more like a scalping to achieve a targeted alleviation of a given debt burden.
Small wonder private investors continue to shy away from eurozone peripherals.
Give me priority – Deus Ex Macchiato
That tricky ESM seniority – still tricky – FT Alphaville
ESM panic! Subordination, restructuring, CDS, oh my! – FT Alphaville