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Samstag, 21. April 2012

ECB seniority and dirty hands

ECB seniority and dirty hands


First, do read Dan Davies’ bailout options post if you haven’t already. It’s like a Greek Kobayashi Maru. Except you have no hope of ending up like James T Kirk. We got to number 5.
But speaking of Greek debt situations where there are no good outcomes left…
There’s been an enormous, justified fuss over the ECB swapping its Greek bonds held in the Securities Markets Programme. Ultimately though it is – in practical terms – about getting away with the least egregious level of seniority for the ECB now, not avoiding ECB seniority altogether.
The exchange is to stop the bonds getting retroactive collection action clauses (thus, exposing the SMP to forced losses) in a Greek parliamentary vote likely to be held next week, as part of the “stick” in the PSI offer to bondholders.
The ECB’s swapped bonds will be just like the old ones, sharing the same payment features etc, except (effectively) the bonds’ serial numbers are getting filed off. It’s probable that the legislative act will list the Greek law bonds to be CAC-ed by their series or ISIN, which would have swept up the ECB’s holdings. No other holder gets to ghost out like this.
It’s perhaps not so much that losses would be forced on the SMP – but that they would be heavy or in line with the PSI’s 75 per cent haircut to net present value. Thus below the SMP’s purchase price. The central bank treats that kind of loss as monetary financing (see Draghi’s points in February’s press conference.) Friday’s swap has reportedly switched the ECB’s bonds at par, thus generating a paper profit for the SMP.
“[T]he ECB’s stock of Greek bonds have suddenly become senior to everybody else’s stock of the exact same securities,” Felix has fumed in response. Well, sure: we warned about the need for retro-CACs doing this, a while back. It is a crummy episode in eurozone capital markets. It is a low point in inter-creditor equity; a risky precedent for the SMP holdings in other eurozone sovereigns.
It is… very difficult to see what the alternative was.
What could you do instead?
a) Let Greece write its law specifically excluding the ECB by name, rather than allowing its holdings to silently drop out via the ISINs
b) The direct route: Let Greece go ahead and insert retro-CACs into the ECB’s holdings
c) Abandon the retro-CAC law altogether
We think a) would have made the ECB’s seniority much more egregious. For b), certainly the momentum of PSI is maintained… at the expense of throwing the central bank into legal risk and probably, serious infighting as a full EU Treaty violation hoves into prospect. How long would the entire SMP portfolio last in that scenario. It’s c) that seems a total non-starter; a negotiated write-down is already hanging by a thread given the attitude of northern eurozone governments.
Also, go back to the swap being carried out at par value, and not the SMP purchase price. Again… it’s egregiously, awfully senior. But then the ECB has been accounting its SMP holdings on a par basis, holding them to maturity. Bonds held by the SMP have been “pulled to par” over time by absorbing payments on the debt.
In short, yes not getting CAC-ed up leaves the ECB senior in a crummy way, but a voluntary write-down in the SMP remains on the table, at somewhere between the purchase and par price, surely. In other words the ECB offloading its paper profit. However that ECB seniority now depends on what the purchase price actually was, and how far away it is from the PSI writedown of 75 per cent.
First, we’d note with some amazement this Reuters story on the other ECB holdings, beyond the SMP, in national eurozone central bank reserves…
(Reuters) – The European Central Bank is weighing up whether to allow the Greek bonds held in national euro zone central banks’ investment portfolios to be subjected to the same writedowns private investors are set to take, central bank sources told Reuters…
For those holdings, which we’d doubt were acquired seriously below par, that’s a fairly large write-down, no? Or at least it would be a tilting of the balance back to equitable treatment of creditors.
But then there is the SMP purchase price. It’s still a mystery. It’s usually been estimated at around 75 cents in the euro on average, since the ECB began buying Greek bonds in May 2010. We’ve mentioned that figure before.
Well, we should mention one estimate from Nomura analysts last week that deserves more attention than it got the first time…

http://ftalphaville.ft.com/blog/2012/02/17/886061/ecb-seniority-and-dirty-hands/

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