Rationale behind ECB opposition to burning senior bondholders

[Brendan Burgess]

An excellent article by Dan O'Brien in today's [broken link removed]

The ECB believes the euro zone’s financial system is so weak and fragile that a serious shock could lead to cascading defaults, bringing the entire edifice down and, with it, the continent’s real economy. It does not believe that default can be “orderly” in the current circumstances. Rather, it feels that those who believe an orderly default can be engineered hugely overstate the capacity of the authorities to manage such events.
For these reasons, it has been consistently and implacably opposed to default in either of the two largest and most important debt markets – those of government and senior bank bonds.


There has not been a sovereign default in a developed country since the middle of the last century. There has not been a senior bank bond default during the euro era. As a result, both asset classes have been considered by market participants to be effectively risk-free.


...
Apart from Ireland, nobody else in the euro zone has sought to make seniors take their losses so there are no cases to which one can point as evidence. But an immediate neighbour’s experience has been watched very closely...


When two Danish banks failed earlier this year, their seniors were burned. This raised funding costs for the entire Danish banking system.


From the euro zone perspective, the ECB is obliged to consider that if a default precedent were to be set in the senior bond market, then at the very least funding costs for all banks in the zone would rise. The savings for Ireland of a few billion euro would be offset many times over by the generalised increase in funding costs for the already-teetering euro zone banking system.

 

[onq]

+1

Just to prove we sometimes agree completely I think this is a good article - most Irish people now realise we intend to return to the bond market at some point in the future.

If you're going to the bond markets for finance, an alternative to seeking finance directly from banks, often at a more favourable rates, you need to consistently present a good profile to people who buy bonds.

You'll burn them once, but you'll have burned your bridges as well - not a good idea in a volatile world economic environment.

Even if it settles thereafter, it'll be volatile again in due course.