The European Central Bank (ECB) has addressed a concern regarding its intervention into the Eurozone bond markets by renouncing any claim to seniority over private sector creditors in its new bond buying programme. This means pari passu treatment with private creditors regarding bonds bought via the ECB’s Outright Monetary Transactions (OMT).
Background
On 2 August 2012 the European Central Bank (ECB) announced that it would undertake outright transactions in secondary bond markets. The aim is to bring bond yields, at the long end of the curve (i.e. 10 years) down to levels that lower borrowing costs for countries that face problems selling debt and provide investors with confidence to buy bonds in a normal market.
The ECB however has inherent seniority over other creditors (along with many supranational entities - who hold preferred creditor status). A recent illustration of this was the ECB’s decision to claim seniority over holders of Greek government bonds. Rather than accept the effective 53.5% haircut on their bonds, which most other private investors took, the ECB was repaid in full on some of its bonds. Therefore any action by the bank in the market comes with a level of subordination over other creditors, and therefore impacts risk premiums sought by private investors.
The ECB’s existing bond buying programme, the Securities Market Programme (SMP), has been terminated, and bonds bought under the SMP will be held to maturity. However the bank’s preferred creditor status for these securities will remain unaltered.