–Asia,Mideast Cen Banks, SWFs ‘Annoyed’ by ECB Exemption From CACs

By Brai Odion-Esene

WASHINGTON (MNI) – The European Central Bank’s exemption from the
conditions imposed on other investors during the Greek debt swap could
add to the risk sentiment associated with Eurozone sovereign debt, a top
banking association executive said Monday.

“Our view is that holdings of government bonds, particularly if
they are held by central banks as part of their investment portfolio,
should not be treated any differently from holdings of the same
government bonds by the private sector investors,” IIF Deputy Managing
Director Hung Tran told MNI.

“If there is an occasion for a debt exchange, then all holders of
bonds should be participating in the exchange, without exception,” Tran
said, adding a warning about how it might affect future investor
behavior.

“If government bonds are seen to be treated in a certain way —
with European central banks’ holdings being exempted from any potential
debt exchange — then investors have to include that into their
assessment of credit risk of holding the government bond,” Tran warned.

And, “if the practice becomes more widespread, then it certainly
would become an issue for investors to look at when they make a
decision,” he said.

During the Greek government debt swap earlier this year, the
holdings of the European Central Bank and the national central banks of
the euro area were exempt from the collective action clauses.

A CAC allows a supermajority of bondholders to agree to a debt
restructuring that is legally binding on all holders of the bond,
including those who vote against the restructuring. An exemption from
the CACs means the ECB would not have to participate should the Greek
government impose involuntary losses on bondholders in future.

This preferential treatment “annoyed” central banks and sovereign
wealth funds in other areas — particularly those from surplus regions
like in Asia or the Middle East, Tran said.

“They felt that since they are also central banks and sovereign
wealth funds, they are being treated in a discriminatory way,” he said.
“That is an issue of concern.”

Tran cautioned that, “to the extent that central banks anywhere
have made investments in government bonds of euro area countries, they
would feel unsettled if they are not treated exactly the same say as
other investors.”

He added that another issue of concern is the feeling among private
sector holders of government bonds that they are being subordinated by
the exemptions given to national central banks’ holdings of government
bonds.

“If those holdings are backed out of the debt exchange, more of the
burden will be put on private holders,” he said.

Tran said he is not sure how this annoyance will influence the
investment strategy of these central banks and SWFs going forward.

** MNI Washington Bureau: 202-371-2121 **

[TOPICS: M$U$$$,MI$$$$,M$Y$$$,MK$$$$,M$$FI$,M$$CR$,M$$EC$,M$X$$$]