Even though France’s Nicholas Sarkozy and Germany’s Angela Merkel agreed this week to drop a requirement that bondholders in insolvent eurozone countries be forced to shoulder a portion of future bail-outs, like most things in the crisis, the devil remains in the details.
Senior European officials said negotiators for the 17 eurozone countries were still debating the terms of a treaty on the so-called European Stability Mechanism – the new €500bn rescue fund planned for 2012 – and had yet to decide how the Sarkozy-Merkel deal would be implemented.
Negotiators had reached consensus that the treaty’s current language, which states countries deemed insolvent “shall be required” to negotiate bondholder losses, would be excised, officials said.
In its place is likely to be language that implements current International Monetary Fund practice, which allows experts to decide subjectively on a case-by-case basis whether bondholder losses are necessary.
That agreement in itself would be a big climbdown for Germany, which has pushed for the tougher language to be included for more than a year. Germany may be set for a further loss, with some negotiators pushing for even the mention of current IMF practices to be removed from the text of the treaty and moved into its preamble, where it will have no legal weight.
However, other creditor countries, including Finland and the Netherlands, are continuing to push for some nod to possible debt restructurings, if only to keep market pressure on countries with bad records on budget discipline.
“We don’t mind the compromise if it doesn’t ruin the whole idea,” said one senior eurozone official.
But Mujtaba Rahman, a Europe analyst with risk consultant Eurasia Group, said such remaining debates were likely to be of little relevance to financial markets, which had long been concerned that eurozone officials intend to implement Greek-like defaults on other countries.
“Whether the language remains in the treaty or is moved into the preamble is something of an academic debate at this stage; the important point is Germany has conceded ground,” said Mr Rahman, who has discussed the issue with a wide range of bond investors.
Still, European officials have agreed to keep provisions in the treaty that call for so-called “collective action clauses” in all new eurozone bonds, which give sovereign governments more power over bondholders if they decide default becomes necessary.
The lack of such CACs in Greek bonds, for instance, made it more difficult to structure Greek bondholder losses during recent negotiations with international financial institutions.
But officials believe because CACs are already widely used widely in sovereign bond markets – and do not carry and obligation that a default occur when a country appears to be bankrupt – it should have little impact on financial market thinking.
“CACs are an instrument widely used in other parts of the world,” said a German finance ministry official. “All the creditors know and understand them. We are sure we don’t want to have any special European procedures.”
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