IIF criticises ECB for claiming seniority in Greek debt swap

(This story first appeared on website of the International Financing Review, a Thomson Reuters publication: www.ifre.com)

By Christopher Spink

LONDON, June 6 (IFR) - The European Central Bank's decision to claim seniority to other holders of Greek government bonds has "set a very bad precedent" according to one of the negotiators which represented private sector investors in the deal to restructure the country's debts earlier this year.

Since May 2010, the ECB had bought up Greek sovereign bonds with a par value of EUR40bn in the secondary market under its securities markets programme. Most were bought at significant discounts to their nominal value.

However, rather than accept the effective 53.5% haircut on their bonds, which most other private investors took when accepting a range of new securities in exchange for old ones, the ECM circumvented the offer at the last moment. It has since been repaid in full on some of the bonds, thus making a profit on the deal.

Hung Tran, deputy managing director of the Institute of International Finance, which represented private sector investors in negotiations, said the side-deal, meaning private sector investors were subordinated by several international organisations, was "completely without justification".

Additionally he said this could have an impact on other sovereign debt negotiations and deter private sector investors from buying other peripheral sovereigns' debts, widening the latter's spreads over German Bunds and exacerbating their problems in issuing new bonds.

However, a representative of the official sector, also speaking on a panel with Tran at the IIF's Spring Meeting in Copenhagen, denied the ECB's move in Greece necessarily had wider implications for future sovereign debt restructurings.

"This was a very delicate and exceptional situation," said Clotilde L'Angevin, secretary general of the Paris Club of international sovereign creditors. "There was no precedent set regarding new seniority," added L'Angevin, who is already head of international debt at the French Treasury.

No implications

Whilst acknowledging that the ECB was independent of European governments, she warned the market against being "too quick to make any conclusions regarding preferred creditor status or special protection for any creditor. You can't take any implications from this."

L'Angevin added that all principles of Paris Club negotiations were respected during the Greek discussions leading to the 'private sector involvement' deal, denying that the official sector, and the ECB in particular, got special treatment.

"Everyone made concessions. Greece accepted the change in jurisdiction in its new bonds to English law; there was a sweetener for the new bonds backed by the official sector; Greece paid accrued interest on its old bonds too," she said.

L'Angevin also pointed out that many private sector investors had also been paid in full effectively via money from the official sector under Greece's first EUR110bn bail-out, which started flowing in May 2010. As much as EUR60bn was used to repay maturing bonds before the debt swap in March 2012.

Looking ahead she said the official sector's exposure to Greece, set to rise to EUR240bn by the end of 2013, far exceeded the private sector's. Significant challenges remain for Greece too if it is ultimately to regain market access too.

"PSI and official sector loans will not solve all Greece's problems," said L'Angevin. "Greece will have to implement the new structural reforms [agreed under the second bailout memorandum with the ECB, IMF and EU] if it is to regain market access."

(Reporting by Christopher Spink; editing by John Mastrini)