LONDON: Resentment at the European Central Bank's immunity from losses on Greek debt has left fund firms wondering about the strength of their creditor rights and whether they should blacklist bonds purchased during emergency sprees by the lender of last resort.
By sidestepping markdowns on Greek bonds, the ECB has effectively robbed fellow senior creditors of their top rank status, investors say, forcing each to forgive a greater proportion of the debt than they might otherwise have needed to.
"I think many investors believed that as they were holding the same bond as the ECB, they should therefore be considered in the same boat as the ECB," said Michael Krautzberger, head of the Euro fixed income business at BlackRock.
"We've now learned that the ECB in a really stressed scenario or default will be senior to you so there's still a lot of nervousness in the market," he added.
When borrowers issue bonds the bond is structured so that so-called senior bondholders rank first for repayment, but in cases where borrowers cannot repay they may be forced to write off some or all of the loan.
The Institute of International Finance, the body that represents most private holders of Greek debt, is pushing its members to accept a 53.5 percent loss on the face value of their bonds to help Greece avoid a disorderly default.
The ECB, though, was made exempt and is due to be repaid in full. The ECB argued it had no choice but to buy Greek debt to help calm markets, unlike other senior bondholders who had a choice over whether to invest - even if they did so before the extent of the Greek crisis was clear.
And there are now fears that the central bank might one day insist on special treatment for bonds issued by other beneficiaries of its Securities Markets Programme - Portugal, Ireland, Spain and Italy - if those economies continue to falter.
Yields on 10 year Portuguese debt are currently nudging 14 percent after a short-lived relief rally during February having peaked at 17.4 percent at the end of January in the wake of a ratings agency downgrade.
The rise shows that Portugal is having to pay out bigger sums to encourage investors to buy their bonds, hiking their funding costs over the long-term.
MISTRUST STALKS MARKETS
Members of the 'Troika' of official Greek creditors - the European Commission, the International Monetary Fund and the European Central Bank - have pledged to confine private sector burden sharing to the restructuring of Greece's colossal debts only.
But talk is cheap, said Jerome Booth, head of research at blue chip debt investment specialist Ashmore, one of a growing number of managers who feel Europe will pay a high price for changing the rules on which healthy credit markets rely.
"What they do not understand is the word precedent. Saying it won't apply in the future is rubbish. Absolute nonsense. They have no credibility when they say that. Zero," he said.
Speculation that other bodies who helped to grease the wheels of the region's logjammed credit market like the European Investment Bank could also seek the same protection as the ECB, has hardened the resolve of investors not to pay senior prices for bonds that are actually riskier than they look.
"Did you spot the clause in your bond documents that said that you were buying the subordinate tranche of the government bond market?" M&G Fund Manager Jim Leaviss said. "Of course it never existed...the law is torn up and rewritten."
CORPORATE SAFER THAN SOVEREIGN?
Roiled by what they see as creditor discrimination, many investors are stalling on a return to market because they say politics has made sovereign bonds almost impossible to price. That is preventing a fall in yields to more sustainable levels.
"There is more comfort in investing in corporate credit and high yield bonds, than in sovereign debt 'credit'," Chris Iggo, head of fixed income at AXA Investment Managers argued.
"The Greek elections in April, the French presidential elections in April and May, and the risk of setbacks in creating a more stable financing environment all warn against being too aggressive-positive on peripheral sovereign debt at this stage."
Restoring the trust of creditors is just as important as pushing forward with the structural reforms Greece needs to grow its way out of bankruptcy, managers said.
"From our point of view we're not participating in these bond markets. We've been out for some time," said Richard Batty, global strategist at Standard Life Investments. "This is an extremely tricky situation and investors are not going to come out well out of this."
German Chancellor Angela Merkel has admitted to worries that investors will lose faith unless rapid progress is made. "We absolutely must make use of this time, otherwise we will find that the world does not trust us," she told Thursday's European Union summit, on the same day officials punctured the market's upbeat mood with news of a delay to the passage of bailout funds to Greece.
Fixed income managers say their creditor rights have never felt more vulnerable to attack, compounding the perils of lending to euro zone governments and signalling patchy support for future issues.
"It's been a wake up call," Philip Poole, global head of investment strategy at HSBC Global Asset Management said.
"The real problem was people thought that the euro zone umbrella meant everything underneath it had the same credit quality. That was clearly the wrong call."
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