We’re not inclined to call Portugal’s €1bn auction of 2013 bonds on Wednesday a failure exactly. At least the bonds were actually sold.
Even if at a yield of 5.99 per cent, versus the last auction price of around 4 per cent.
Still, that result is a bit curious when you think about the maturity of this bond. We know the Portuguese debt market is breaking down as foreign investors take flight and the bailout talk goes on. But at least the European Financial Stability Facility is in place until 2013 and able to make rescue loans.
Which gives investors a valuable window of protection against restructuring (swapping short-term bonds to long-term ones) before or at that point.
Right? Well…
Consider what the Greek 05/20/2013 bond has done in March:
And the Irish 04/18/2013 bond yield just broke 8 per cent:
Note that market conditions in all three markets remain very illiquid. Still, perhaps a penny is dropping over very near-term restructuring risk.
In 2013, the European Stabilisation Mechanism will go online. Being senior to other creditors and accompanied by rules that would require collective action clauses in every eurozone bond issued after 2013, it won’t really encourage anyone to invest in peripheral debt – but perhaps it won’t encourage restructuring either.
True, the ESM is very likely to require restructuring of national bonds at the same time as it lends to states. Meaning that you’d perhaps indeed be wary of holding a bond that matures in 2013, should Greece, Ireland of Portugal immediately access the ESM that year. (Five-year or ten-year bonds have been damaged by longer-term threats of ESM access as well.)
However, we wonder if the timing of restructuring should be the other way around. Between 2011 and 2013. It’s easier to pass a national law retroactively applying exchanges to all outstanding bonds, as opposed to the ESM’s restrictions of EU laws and bonds issued only after 2013.
Before 2013, incidentally, it would also be a lot easier to use the EFSF to finance bond buybacks or to collateralise its own bonds, exchanged for peripheral debt.
Don’t restructure via the ESM. Do it now.
Crazy?
Well, we’re not the ones buying Portuguese bonds.
Related links:
Iceland vs Greece – FT Alphaville
The EFSF chief executive writes in… – FT Alphaville
Eurozone bond buybacks, unmoored – FT Alphaville