The ECB just changed the rules of the European debt game.
The ECB, on its own and without judicial or parliamentary review, has swapped their Greek debt for new Greek debt that is not subject to any “collective action clause.” They did this unilaterally and without the consent of any other sovereign debt bond owners of Greek debt. They did this without objection of any nation in Europe. They have retroactively changed the indenture, the contract made by Greece with all of the buyers of their bonds, when the debt was issued. There is no speculation involved in these statements, there is no longer any guesswork on what might be; the ECB swapped their bonds for new Greek bonds with the assent of the Greek government and it is now a done deal.
We know now that the ECB can retroactively change the rules, change an indenture, so that if the ECB can do this with Greece then it can certainly do it with any sovereign debt in Europe.
Since the ECB can now retroactively change any bond contract to whatever it likes and with any nation in its dominion then the valuation of European sovereign debt must be re-examined for what it really is which is no longer what anyone previously thought. Starkly put; the bonds issued by the sovereign nations in Europe are no longer pari passu, on equal footing, with the bonds issued in the United States. We have just passed a clearly defined “break point” where the legal rules were changed to the great disadvantage of all the private debt holders.
The European Central Bank, in a very misguided attempt to protect itself, has now opened Pandora’s Box. I doubt if they even realize what they have done; but they will, most assuredly they will. The consequences of their horrendous mistake will soon be upon them as institutions not coerced or forced into buying European sovereign debt will be leaving the playing field en masse as the realization dawns upon investors of just what has taken place.
The European Central Bank is swapping its Greek bonds for new ones to ensure it isn’t forced to take losses in a debt restructuring, three euro-area officials said yesterday.
Bill Gross of PIMCO sums up:
Now perhaps the protestations are just the vain rumblings of creditors who don’t like having to take a haircut: after all, all investments carry such a risk. On the other hand, it’s one thing to duplicate money to pay back debt (the “normal option”) and it’s quite another to effectively enforce a change to the terms of private contracts by curtailing pari passu. But — in this case — the “normal option” of printing the money to pay back the debt is not available to Greeks.
The point is that if the ECB can do this it means that all debt denominated in Euros is subordinated. This will (eventually, once the market gets the message) cause a collapse of demand in European sovereign debt.
Either borrowing costs will massively spike, crashing the system, or the ECB will go on a money printing binge. These two options have been discussed above. German attitudes to monetary expansion are frosty to say the least, but at this stage I think all options are on the table.