Portuguese government bond yields — still unmoored:
Portugal’s 10-year bonds now yield 7.5 per cent. Quite unmoored.
Long-term plans to resolve the eurozone crisis — joining them there, increasingly.
Everyone still seems to be digesting the results from a state election in Germany, in which Angela Merkel’s party was roundly trounced. Likely not for its European policies, but there’s still been a legislative backlash against eurozone bailout proposals all the same.
In particular, against allowing the European Stability Mechanism to buy debt of distressed sovereigns, or indeed lending to governments to allow it to buy it back themselves.
Not only that — but Merkel’s coalition partners also want a ‘special’ deal on Greek debt buybacks to be ruled out before the ESM comes online in 2013, the FT reports.
Given their implications, we’re not sure these two objections have been digested nearly enough yet.
It was always a little odd to ask the ESM to conduct bond buybacks, we would argue: the one thing that has always been (fairly) clear about the mechanism is that it would be senior to private creditors. Thus, buying debt off some private investors would leave those remaining in an even more precarious position. That outcome, in its turn, would really create a truly two-tiered peripheral bond market.
For that very reason, the EFSF was always a perfect candidate to buy Greek debt. While it technically ranks pari passu with private buyers, it’s noteworthy that there’s already much talk of rescheduling existing official loans to Greece, as a sign of that ‘whatever it takes’ political will to save the euro. Not private loans.
At the same time, holders of the EFSF’s own bonds benefit from access to collateral (the guarantees of eurozone member states), which opens the door to the EFSF giving Greece holders its own bonds in exchange, Brady-style, and cushioning the Europe-wide losses from a Greek debt work-out. Not assured by any means, but the options are there from a ‘special’ deal, alongside extra fiscal-side reforms at the EU level.
Or were there.
Prevent a Greek deal pre-ESM — and that all goes. Going with it – the chances of a soft landing for a Greek restructuring, we’d say.
Related links:
Fitch previews a precarious ESM - FT Alphaville
EFSF mission creep, a collateral story – FT Alphaville
Europe is planning to solve the wrong crisis – FT
Six scenarios in search of a eurozone solution – FT Alphaville