LONDON: When 10 wealthy countries first demanded legal provisions making it easier to restructure government bonds in a crisis, they never thought this would apply to their own debt.
A decade ago the Group of 10 had places like Argentina or Mexico in mind, and yet from next week new euro zone government bonds will include these "collective action clauses" (CACs).
Applying such clauses - which can force investors to accept big losses on their bond holdings - acknowledges that a developed country can go bankrupt and debt default is no longer the preserve of emerging market governments.
From its own perspective, the euro zone has sound reasons for inserting the clauses. An absence of CACs on many Greek bonds allowed hedge funds to make big profits by dodging a write down of the country's privately-held debt earlier this year.
From Jan. 1, 2013 all newly-issued euro zone government bonds will carry CACs, making it the first developed market to impose such clauses routinely.
They will allow a two-thirds majority of bondholders that agrees to a restructuring to force a dissenting minority to participate. In future, everyone will have to share the pain, should a government go the same way as Greece and need to cut its debt burden radically to avoid defaulting.
The aim is to make it easier and less costly for a government to restructure its debt. At the same time, the measure could, under certain conditions, create a two-tier market, with bonds not covered by the new regime worth more.
In 2003 the G10 made CACs the norm for most emerging market bonds issued under international law.
The group, which includes several euro zone countries, hoped to avoid a repetition of the U.S. bailout of Mexico during the "tequila crisis" of 1994-1995 or the large number of holdouts - investors who refuse to accept a debt writedown voluntarily -
that complicated Argentina's restructuring in 2001.
LIFE NO LONGER SO SIMPLE
No G10 member included CACs in their domestic legislation, seeing a developed country bankruptcy as all but inconceivable.
Three years of euro zone debt crisis has changed all that. "(The G10) did not particularly perceive the CAC provision to be of relevance for themselves," said David Hiscock, senior director for market practice and regulation policy at the International Capital Market Association.
"It was more aimed at emerging countries issuing debt under international law, such as Mexico. Recent times have suggested maybe life is not as simple as that, certainly in the euro zone."
The scale of debt to be covered by CACs has ballooned since they were first debated. Anna Gelpern, a professor of law with the American University Washington College of Law, who has researched CACs for the past 15 years, said "the debate about including CACs was about a $300 billion market".
Now, with the euro zone adopting them, that sum could top $10 trillion in 10 years when the region will have rolled over most of its current bonds. "We're entering a new era when (developed market) money can be restructured," Gelpern said.
TWO-TIER MARKET
Over time this could lead to a two-tier market in euro zone bonds: those subject to CACs, which could impose losses on holders, and those without, whose holders - as happened in Greece - just might be repaid in full.
http://articles.economictimes.indiatimes.com/2012-12-28/news/36036473_1_euro-zone-greek-bonds-market-bonds
A decade ago the Group of 10 had places like Argentina or Mexico in mind, and yet from next week new euro zone government bonds will include these "collective action clauses" (CACs).
Applying such clauses - which can force investors to accept big losses on their bond holdings - acknowledges that a developed country can go bankrupt and debt default is no longer the preserve of emerging market governments.
From its own perspective, the euro zone has sound reasons for inserting the clauses. An absence of CACs on many Greek bonds allowed hedge funds to make big profits by dodging a write down of the country's privately-held debt earlier this year.
From Jan. 1, 2013 all newly-issued euro zone government bonds will carry CACs, making it the first developed market to impose such clauses routinely.
They will allow a two-thirds majority of bondholders that agrees to a restructuring to force a dissenting minority to participate. In future, everyone will have to share the pain, should a government go the same way as Greece and need to cut its debt burden radically to avoid defaulting.
The aim is to make it easier and less costly for a government to restructure its debt. At the same time, the measure could, under certain conditions, create a two-tier market, with bonds not covered by the new regime worth more.
In 2003 the G10 made CACs the norm for most emerging market bonds issued under international law.
The group, which includes several euro zone countries, hoped to avoid a repetition of the U.S. bailout of Mexico during the "tequila crisis" of 1994-1995 or the large number of holdouts - investors who refuse to accept a debt writedown voluntarily -
that complicated Argentina's restructuring in 2001.
LIFE NO LONGER SO SIMPLE
No G10 member included CACs in their domestic legislation, seeing a developed country bankruptcy as all but inconceivable.
Three years of euro zone debt crisis has changed all that. "(The G10) did not particularly perceive the CAC provision to be of relevance for themselves," said David Hiscock, senior director for market practice and regulation policy at the International Capital Market Association.
"It was more aimed at emerging countries issuing debt under international law, such as Mexico. Recent times have suggested maybe life is not as simple as that, certainly in the euro zone."
The scale of debt to be covered by CACs has ballooned since they were first debated. Anna Gelpern, a professor of law with the American University Washington College of Law, who has researched CACs for the past 15 years, said "the debate about including CACs was about a $300 billion market".
Now, with the euro zone adopting them, that sum could top $10 trillion in 10 years when the region will have rolled over most of its current bonds. "We're entering a new era when (developed market) money can be restructured," Gelpern said.
TWO-TIER MARKET
Over time this could lead to a two-tier market in euro zone bonds: those subject to CACs, which could impose losses on holders, and those without, whose holders - as happened in Greece - just might be repaid in full.
http://articles.economictimes.indiatimes.com/2012-12-28/news/36036473_1_euro-zone-greek-bonds-market-bonds
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