ZeroHedge (ZH) has a lengthy
but remarkable post on the issue of subordination and the motivation of hedge fund holders of non-local bonds to stick up (called blocking) the process and, in fact, go the legal route on debt defaults. ZH cites historical examples of how successful this approach has been and seems to believe these actors will never agree to a haircut, which helps explain the difficulty of doing a deal.
Non-local means issued under UK law. UK law requires certain high participation levels in voluntary restructurings and complicates collective arrangements, which I discussed before. ZH argues, and I concur, that this will confound the whole process tremendously. Pari passu (equal treatment for same class), including the exclusion of central banks from taking haircuts (
central bank immunity), forces most of the risk on hapless local-issued bond holders. There is no way Europe can reduce its debt load on the backs of a minority of bondholders, and without the ECB, IMF and non-local bondholders participating. You end up with a bizarrely tiered market and inadequate debt reduction.
What really blows my mind though is just how many Italian and Spanish bonds were issued under UK law, nearly 1.2 trillion euros worth. Frankly, if this data is correct, this is my first realization as to just how huge the UK law Italian and Spanish bond market are. Greece is just a warm up to the big prizes. Combined with LTRO privatization schemes [
The Coming Privatization Scam] this just throws open the door for crony capitalist kleptocrats to unmercifully game the system. It seems so far that I am the lone wolf that is connecting the dots on this. The short, post-Greece stage II version of the ZH post seems to point to endless “arbitrage” and gaming opportunities coming on the multitude of non-local Spanish and Italian debt. This 1.3 trillion euro senior/ junior market is like playing with turds in sandboxes for the hedge fund boyz. They can short one againt the other, look for the small print, and on and on. The average Joe is going to be butchered in this scheme.
Interestingly there is a little fight back on privitizations in Spain, as the conservative government rejects “fire sale” bids on Barcelona and Madrid airports. The Socialists wanted to sell them. In Italy, voters opposed a utility privatization, and the new
government is ignoring them. My theory is that privatizations are motivated by the left’s desire to use them to maintain programs and handouts, and the right to benefit their kleptocrat buddies. What a perfect partnership. As far as the sale holdup goes, it is nothing that a renewed “debt crisis” won’t cure. Budget Minister Cristobol Montoro has warned that Spain will not meet its target deficit of 4.4% of GDP in 2012. Montoro said that this target was based on an outdated forecast of 2.3% economic growth for Spain in 2012 made by the previous government.
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http://ilene.typepad.com/ourfavorites/2012/01/stick-it-to-the-local-issued-bond-holders.html
