No special status for new eurozone bonds
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Bonds issued by the eurozone’s new €500bn rescue fund on behalf of Ireland, Greece and Portugal will not enjoy preferred creditor status, making it easier for those countries to return more quickly to private capital markets.
The adjustment to the European stability mechanism was agreed by eurozone finance ministers at a meeting in Luxembourg on Monday dominated by concerns about Greece.
The change marks a subtle but important change to the terms of the ESM unveiled by European leaders in March, when they had decided that the new rescue fund’s bonds would enjoy preferred status to those of all other creditors, save the International Monetary Fund. That seniority would have put ESM bonds at the front of the queue for repayment and was intended to make the rescue fund more palatable to taxpayers.
Jean-Claude Juncker, the president of the Eurogroup, said reversing the policy was “good news” for each of the three countries. “This should make it easier for these countries to come back to the market,” he told journalists in Luxembourg.
The ESM is set to become operational in mid-2013, when it will take over from the temporary €440bn bail-out fund, the European financial stabilisation facility, that eurozone governments cobbled together in the midst of last year’s Greek bail-out. The EFSF’s bonds do not enjoy preferred status.
The mismatch between the two funds had added to concerns about the ability of Greece, Ireland and Portugal – all of whom have tapped the EFSF for cash – to return to private capital markets for funding. The chief worry among investors was that any new bonds they purchased would become junior if one of those governments was later forced to seek fresh assistance from the ESM.
For Ireland, the worry is particularly acute since under the terms of its €85bn rescue package it is supposed to return to private markets in late 2012 – just months before the ESM begins operations. The mismatch has also created issues for Portugal because some of the money it is due to receive from its €110bn package may not be paid until after the ESM has replaced the EFSF.
Mr Juncker also announced changes to the EFSF’s capital structure intended to make the fund more effective. Its working capital will be increased to €726bn – amounting to an over-guarantee of 165 per cent – so that it is able to lend its full €440bn capacity, if needed.
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