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So I would conclude that Merkel's March 2011 comments were probably motivated by the financial sphere's negative reaction to the Deauville proposal, saying "don't be scared, me and Sarko only proposed this for after 2013".

March? Merkel's position since October has been no losses for private bondholders before 2013

Germany's Angela Merkel, by contrast, pushed ahead with her plan to set in concrete the principle that government bondholders should be prepared post-2013 to suffer losses if a government can't pay its bills. She got her way and EU governments this month backed the principle as part of a future financial-rescue regime. Do note, however, that even conservative Angela Merkel kicked the can down the road a couple of years like any run of the mill politician is likely to do.

Even so, Ms. Merkel's decision to be explicit about the possibility of future bondholder losses spooked the markets. There, a little more ambiguity might have been a good thing. Usually markets tend to like certainty but it is apparent that bondholders of sovereign debt dislike the certainty that in the future they will have to share in losses due to governments having a solvency problem and restructuring, really defaulting, on government bonds.

Of course, if you tell the markets you'll allow defaults after 2013, you won't be able to place any bonds in the open market with maturities after 2013...

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Jun 16th, 2011 at 07:18:31 AM EST
[ Parent ]
Merkel's position since October has been no losses for private bondholders before 2013

For October, that's interpretation, for March, it's explicit. (And before Merkel and Sarko brought that proposal in, there was no one proposing it for any time including after the ESFS, either.)

Either way, there is no contradiction between the Schäuble proposal and either the Deauville Declaration or Merkel's March 2011 promise that I can see, and all of them seem motivated by appeasing the don't-spend-our-precious-tax-euros members of the own camp.

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Thu Jun 16th, 2011 at 07:25:43 AM EST
[ Parent ]
Actually, let's be precise: Merkel's position since October has been no mandatory losses for private bondholders before 2013.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Thu Jun 16th, 2011 at 07:29:30 AM EST
[ Parent ]
The distinction between voluntary and involuntary bailins is academic. If the bondholder arrives at an agreement with the bond issuer there's nothing Merkel or anyone else can say about it.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Jun 16th, 2011 at 08:12:43 AM EST
[ Parent ]
that I was afraid to ask :

why would a sane bond-holder accept a "voluntary" bailin?

The Nonsense of purely voluntary Bail-ins

A purely voluntary maintenance of exposure at current market rates would make the sovereign's debt even more unsustainable and, in time, will ensure a default on the new bonds. The only way to prevent the coupon/yield on the new bonds from being close to market rates and thus unsustainable would be to provide the new bonds with seniority or some collateral; but both options are undesirable as a rollover is not a case of "debtor-in-possession" financing and thus doesn't justify such credit sweeteners.

 

If, instead the rollover occurs at original coupon or well below market rates, so as to provide Greece with some debt relief, the rollover option is not purely voluntary and has coercive elements; thus, it is not different in any substantial way from the orderly debt restructuring, or reprofiling, that the ECB and other official sector folks so vehemently oppose.



It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
by eurogreen on Thu Jun 16th, 2011 at 09:56:06 AM EST
[ Parent ]

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