Fresh out of S&P this evening:
* We are assessing the credit implications of the proposed European Stability Mechanism (ESM) that may govern EU sovereign bonds beginning in July 2013.
* Specifically, we believe that assigning “preferred creditor” status to future official lending via the ESM could be detrimental to the ability of non-official holders of sovereign debt to be repaid.
* Since the details of the plan are still emerging, we are placing our ‘BB+’ long-term sovereign credit rating on Greece on CreditWatch with negative implications.
* The negative CreditWatch placement reflects our belief that Greece might be a future recipient of ESM funding.
And here’s why, from the S&P release (emphasis ours):
On Nov. 28, 2010, the European Council endorsed, in principle, the permanent institutional set-up for European Monetary Union (EMU) sovereign borrowing that is to follow the closure of the European Financial Stability Facility (EFSF; AAA/Stable/–) in June 2013. We have identified what we consider to be two key differences between the ESM and the EFSF:
* A key difference between the current EFSF and the contemplated ESM lies in the apparent ability of the ESM’s sovereign shareholders to trigger a debt restructuring on a case-by-case basis. We understand that this restructuring would potentially include private bondholders holding bonds issued by those EMU sovereigns declared insolvent (based on the application of as yet undisclosed criteria or procedures). We believe that the multilateral political prerogative to trigger private debt restructuring could be subject to political rather than objective financial considerations. We also believe that it is possible that European policymakers might, in the midst of a future crisis, make uncoordinated and even contradictory statements, potentially causing market distortions and jeopardizing funding access of individual sovereigns.
* Notably, the public statement by the Eurogroup finance ministers envisions that any post-2013 lending by the ESM will benefit from “preferred creditor” status, effectively subordinating non-official holders of sovereign debt to the ESM. We believe that such subordination could hurt the prospects of timely and full repayment of non-ESM sovereign debt and would likely lower recoveries on such non-ESM sovereign debt.
Related link:
If not the ECB, whom? – FT Alphaville