Nothing like a crisis: Game On!


Angela Merkel has been speaking today in the Bundestag on a plan to impose majority voting in the terms and conditions of certain Eurozone bond issues. She said “This is about the primacy of politics; this is about the limits of the markets.”

In any market segment the majority of issuance is usually held domestically (for obvious reasons) and the banks are often the biggest holders. This is particularly so when the “bank recapitalisation carry trade” is advantageous.

Should it be necessary for an issuer to seek an extension in maturity; a cut in coupon; or a reduction in maturity proceeds (generally known as a restructuring on, or prior to, default) majority voting would tend to eliminate private bond holders (such as individuals, overseas pension funds and mutual funds) from the voting process creating de facto senior and junior holders.

Now if those banks were the underlying problem who do you think they are going to vote for? Would it be the individuals, overseas pension funds and mutual funds; or the troubled Government best positioned to reciprocate the favour?

The first rule of fixed income investing is “Get Your Money Back”. Yesterday I suggested that a crisis can have its uses. Today Merkel seems to have started playing the anticipated game.
Game on!

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