Bloomberg News

EIB Privileges in Greek Debt Plan Spur Complaints From Private Investors

March 02, 2012

The European Central Bank, which purchased Greek bonds to hold down yields, negotiated a deal to sidestep the 53.5 percent loss on principal that’s costing private investors as much as 106 billion euros. Photographer: Hannelore Foerster/Bloomberg

The European Central Bank, which purchased Greek bonds to hold down yields, negotiated a deal to sidestep the 53.5 percent loss on principal that’s costing private investors as much as 106 billion euros. Photographer: Hannelore Foerster/Bloomberg

Investors are complaining that the European Investment Bank doesn’t deserve the same exemption from losses on its Greek bond holdings as the euro region’s central bank because it didn’t buy the notes to support monetary policy.

The European Central Bank, which purchased Greek bonds to hold down yields, negotiated a deal to sidestep the 53.5 percent loss on principal that’s costing private investors as much as 106 billion euros ($141 billion). The Luxembourg-based EIB, a development lender that bought Greek debt before the financial crisis, is avoiding the loss in the same way, according to two regional officials familiar with the matter.

“The EIB’s bonds seem very different to the case of the ECB, which can argue it’s buying Greek bonds for monetary purposes,” said Ben Bennett, a strategist in London at Legal & General Group Plc, which manages about $500 billion of assets.

The EIB is owned by the 27 European Union member states and can call on about 96 billion euros of capital from top-rated nations, according to Standard & Poor’s, which has a negative outlook on the lender’s AAA credit grade. Protecting the EIB and other public organizations in the biggest debt restructuring in history means there’s less money left to meet the claims of other creditors should Greece default.

Privileged Creditor

The EIB lends to major infrastructure projects in the EU and beyond. It has shareholder equity of about 41 billion euros and only about 0.1 percent of its loan book is impaired. It has traditionally held privileged creditor status, meaning it’s repaid before other lenders, according to S&P.

The EIB owns more than 100 million euros and less than 1 billion euros of Greek bonds, said one of the regional officials, who declined to be identified because the deal to exempt the lender from losses on the notes isn’t public.

“They really are stretching it a bit, bailing out poor treasury management more than anything else,” said Brian Barry, a strategist at Investec Bank Plc in London. “There must be plenty of jealous treasury departments out there.”

Rainer Schlitt, a spokesman for the EIB in Luxembourg, didn’t immediately reply to an e-mail seeking comment.

Private investors’ concern about being subordinated detracts from the ECB’s objectives in buying euro-nation debt. Yields on Portuguese 10-year bonds jumped 73 basis points to 13.8 percent on Feb. 29 even as the ECB was said to be purchasing the government’s bonds.

The yield on Greece’s 10-year bond climbed as high as 39.2 percent, a euro-era record, and was at 37.1 percent at 12:02 p.m. London time. The price of the note due in October 2022 dropped to 18.63 percent of face value.

Some holders of the nation’s yen-denominated Samurai bonds may also avoid losses in the debt restructuring, according to a statement from Shinsei Bank Ltd.

Whether central bank purchases are “a good thing for bondholders any more is doubtful given the effective preferred- creditor status the ECB are receiving in the Greek restructuring,” said Barry at Investec.

To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net


Toyota's Hydrogen Man
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus