It does look like they are trying to cause markets to discount a very high probability of restructuring.

Any restructuring losses are reductions in financial assets and ultimately deflationary, as former bond holders
have less spending power. Unless the restructuring somehow results in more govt spending on goods and services, which, in this case, it clearly won’t. In fact, it will most likely be followed with additional austerity.

So looks like another whipsaw for the euro- down as people flee the currency over fears of losses due to restructuring
as well as fears of officials willing to restructure doing some other unknown thing that could cause losses, followed by a strong currency once it’s sorted out and considered ‘safe’ from default risk.

France Joins Germany Ganging Up on Bondholders to Share Pain

By Mark Deen and Francine Lacqua

November 11 (Bloomberg) — French Finance Minister Christine Lagarde said investors must share the cost of sovereign debt restructurings, backing a German call that helped send yields on Irish and Portuguese bonds to record highs.

“All stakeholders must participate in the gains and losses of any particular situation,” Lagarde said during an interview yesterday in Paris for Bloomberg Television’s “On the Move” with Francine Lacqua. “There are many, many ways to address this point of principle.”

Irish 10-year bonds dropped for a 13th day, driving the yield up 19 basis points to 8.95 percent and the risk premium over benchmark German 10-year bunds to a record 652 basis points. Ten-year Portuguese yields rose 9 basis points to 7.27 percent, while Greek and Spanish bond yields also climbed.

Lagarde’s comments mark France’s most explicit backing of German proposals to make bondholders contribute in bailouts, which deepened the slump in bonds of the so-called euro peripherals. Risk premiums that investors demand to buy their debt have risen since an Oct. 29 European Union summit when German Chancellor Angela Merkel sparred with European Central Bank President Jean-Claude Trichet over forcing bondholders to take losses in restructurings, so-called haircuts.

“We do have differing approaches,” Merkel told reporters after the summit.

The clash continued during the past two weeks, pummeling European bond markets.

‘Nail in the Coffin’

“Lagarde’s comments mentioned restructuring, and that’s another nail in the coffin” for peripheral debt, said Steven Major, global head of fixed-income research at HSBC Holdings Plc in London. “There’s still a big constituency of investors and traders who have not recognized until now that restructuring could happen.”

The spread between yields of Irish 10-year bonds and German bunds has widened more than 200 basis points since Merkel began her push for burden sharing.

German officials are sticking to their guns amid the bond market rout.

“We do also need creditors to be involved in the costs of restructuring,” Merkel said today in Seoul, where she’s attending a summit of the Group of 20 leaders. “There may be a conflict here between the interests of the financial world and the interests of politicians. We can’t constantly explain to our voters that taxpayers have to be on the hook for certain risks, rather than those who make a lot of money taking those risks. I ask the markets sometimes to bear politicians in mind, too.”

Trichet’s Stance

Trichet says such talk risks exacerbating the situation for indebted nations as they struggle to cut their budget deficits.

“The more you talk about restructuring debt, the harder it is to obtain debt,” Irish Finance Minister Brian Lenihan said Nov. 2. “That is the reality.”

“They are making it more likely that countries like Ireland and Portugal will be forced to restructure their debt,” said John Stopford, head of fixed income at London-based Investec Asset Management Ltd., which oversees $65 billion. “There should potentially be some conditionalities, otherwise it will become a self-fulfilling prophecy.”

The cost of insuring Irish debt gained 20 basis points to a record 617 basis points, according to data provider CMA. Credit default swaps for Portugal added 17 basis points to 494. Fallout from the slump in Ireland and Portugal pushed up the default risk on Spanish debt 12 basis points to 289.

Irish and Portuguese debt has suffered the biggest declines this month among the world’s government bonds. Ireland has dropped 8.6 percent since the Oct. 29 EU summit and Portuguese bonds have shed 5.9 percent.

Portugal Bid

Portuguese Finance Minister Fernando Teixeira dos Santos urged the EU yesterday to clarify how the so-called crisis mechanism will operate.

EU leaders plan to map out by December how a permanent bailout facility might work, and also study how to treat private bondholders and whether to involve the International Monetary Fund. The new system would kick in when temporary measures, set up this year to rescue Greece and protect the euro, expire in 2013.

“We have to make an appeal at the European level for the European institutions to rapidly, with the greatest possible urgency, clarify the terms in which this mechanism will function,” Teixeira dos Santos told reporters in Lisbon.

Lagarde cited several ways in which investors would share the losses in a bond scheduling with taxpayers.

“I’m not specially focused on haircuts,” she said. “We can insist on having in any issuance and in any agreements a collective action clause under which any lender agrees that if something goes wrong, the lender will actually participate in the plan that will solve the difficulty, in the same way that you can have rescheduling over time.”

One Response

  1. Realization beginning to sink in that the EMU is up against the wall due to asymmetry, and it’s going to be impossible to hold the EMU together, and probably the EU, too, by jamming austerity down the throat of the periphery without bondholders and banks also taking a hit? So far the idea has been to make only “the little people” pay. Beginning of a game-changer?

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