On Thursday, RBS strategist Jacques Cailloux published a note on ‘the (irrelevance) of seniority of euro area loans to Greece’.
The piece is worth reading in full especially since the most interesting bit of the note (in FT Alphaville’s ocassionally humble opinion, at least) comes at the very end. Emphasis ours:
There has been increasing speculation in the market about the seniority of euro area loans over Greek bonds. While it is pretty clear that IMF loans will be senior to Greek bonds as is usually the case in such situation, there is less information on the euro area loans. The loans made by the European Community to Easter European countries through their balance of payments support mechanisms were senior to the sovereign bonds and thus were equal to IMF loans. However, we believe that the bilateral loans are a complete different configuration.
Our view is that euro area loans will not be senior to Greek bonds. Why? A seniority of euro area loans would defeat the whole purpose of the backstop facility which was designed initially to protect Greece from defaulting while creating an incentive fro investors to remain confident about Greek debt. A seniority of euro area loans would create no incentive for investors to hold Greek debt; quite the contrary as it would lower the probability of recovery in a default scenario. The political commitment from the euro area needs to, and will in our view, translate in an absence of seniority of euro area loans to Greece.
While Commissioner Rehn has declined to comment on the topic, we have one official statement to date which supports strongly our view. This comment was made by the Dutch Finance Minister in Madrid last Friday. It is interesting as this comes from a country that has been typically reluctant to push for help for Greece. If the Dutch loan will not be senior to Greek bonds, we struggle to see that many other euro area loans will be senior. Indeed, De Jager was reported by Bloomberg Newswires as saying “We are not talking about a special preference for the eurogroup loans” That’s “not possible because then you would have the situation that already-existing rights of creditors at the moment would be harmed”. This does not say whether the loans will be pari passu or less senior than Greek debt but it clearly hints that they will not be senior.
Pushing the argument even further, we are not sure that the debate surrounding seniority is actually relevant as it would only matter in a context of default, a scenario which would equate in our view to the end of the euro, a scenario we do not envisage.
Talking about burying the lede.
Related links:
Guest post: Mohamed El-Erian on the worsening Greek problem – FT Alphaville
The Germans and the Greeks – FT Alphaville
Fears rise of Greece rescue plan falling short – FT