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FEBRUARY 17, 2012, 2:09 P.M. ET
ECB Teaches Bondholders Greek Lesson
By RICHARD BARLEY
Greece's debt restructuring is becoming reality—and the reality of a sovereign-debt restructuring is that sovereigns have powers that other debtors don't. Friday's news that Athens has agreed to swap the European Central Bank's holdings of Greek bonds acquired for monetary-policy purposes for new bonds that won't be involved in any restructuring is a vivid demonstration of those powers.
The ECB bond swap may anger other bondholders. The ECB's new bonds have identical terms and conditions to its old bonds, but different international securities identification numbers. That means that if Greece subsequently inserts so-called collective-action clauses into privately held bonds in order to force holders to participate in a restructuring, the ECB bonds can be excluded. Thus, the ECB is spared from being forced to take a loss. But the ECB's differential treatment is also a violation of the usual principle that holders of the same bond rank equally.
But in effect, not much has changed. The ECB has always made clear publicly that it isn't going to take a loss as a result of a Greek debt restructuring—and with good reason since to do so would risk its credibility. Holders of Greek bonds are still in the same position they were before the ECB swap:
They will have to decide whether or not to tender them in exchange for new Greek bonds. That could include euro-zone national central banks that hold Greek debt in investment portfolios. Ultimately, however, holders of bonds issued under Greek law—the vast majority of Greek debt—are likely to find it difficult to dispute any decisions Greece makes. That is a reality of all local-law sovereign debt.
If markets were worried about the ramifications of the ECB's deal, they didn't show it Friday. Yields on Portuguese bonds, which the market views as likely to require restructuring, were little changed, and yields on Italian and Spanish debt fell. That may be because the market regards the ECB deal as part of the process in handing Greece a second bailout and avoiding a disorderly default—and hence taking a major risk off the table.
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