So the International Swaps and Derivatives Assocation had a swift reply to the question of whether a restructuring credit event occurred after Ireland’s bailout.
But don’t expect questions over credit rankings in eurozone bailout policies to go away too soon. Some details of the European Stability Mechanism ESM were finalised last weekend, and so far this particular facility ranks decidedly senior to bondholders.
From Nomura’s European rates team on Wednesday:
On another note ISDA has ruled that a Restructuring Credit Event had not occurred with respect to Ireland. This was in response to a question raised for vote last week and given extra impetus by EU Council agreements over the weekend reaffirming that any ESM loan would enjoy preferential status to private creditors, junior only to IMF loans. However, the EU states component of the current loan to Ireland was of course constituted under the EFSF vehicle, the claims of which are specified to be pari passu to others against the relevant sovereign. This may have been the factor that tilted the balance. Given the sterner wording surrounding the ESM though we do not expect this issue to disappear off the radar screens completely and note also that it is already attracting the attention of the ratings agencies …
Indeed, Standard & Poor’s issued a statement late on Monday night, which seems to have since flown under the radar a bit. It concerns (as ever) that subordination issue — or the fact that the ESM as currently envisioned has preferred creditor status vs other bondholders. There’s another angle too; the ESM can also impose conditions on loans to sovereigns, including the right to require a debt restructuring.
The S&P statement is fairly straightforward though — it starts with this:
Standard & Poor’s Ratings Services said today that the conclusions reached by the European Council (EC) on March 11, 2011, regarding the workings of the European Stability Mechanism (ESM) appeared to confirm Standard & Poor’s earlier expectations that two key features of the ESM could be detrimental to holders of government bonds issued by sovereigns requiring funding from the ESM, once the latter starts operations in mid-2013 …
Now, ESM seniority is pretty much crucial to forcing losses on private bondholders, which is itself a centrepiece of the new ESM. But at the same time, we imagine European regulators probably don’t want to scare off bondholders too much.
No wonder they’re reportedly reviewing the idea of ESM senior status altogether.
Related links:
Greek debt: restructured - FT Alphaville
Muddling through will not work this time - Wolfgang Münchau, FT
That tricky ESM seniority - FT Alphaville