Forex Flash: Europe bond market set for holdout reform – Nomura

By FXstreet.com | December 05, 2012 AAA

FXstreet.com (Barcelona) - The Nomura Economics team have noted an article in today's FT which reports on a revolution is on the cusp of unfolding in Europe's sovereign bond market next year when Eurozone countries will begin including contentious new collective action clauses (CACs) in their bonds that would compel 'holdout' investors to take part in debt restructuring deals.

The clause aims to prevent recalcitrant creditors from undermining restructuring deals. The Nomura team point out that so far, CACs have been rarely used in developed markets. European Finance Ministers resolved in November 2010 that all countries in the currency bloc from next year incorporate CACs in all their new domestic bonds.

They write that the FT reports that, "there is a bond-by-bond threshold of 50%. So, if a majority of bondholders vote against a restructuring, they can shield that specific bond from the workout." However, doing so is tough, as most countries can rely on more pliant local holders to vote in favour. Lawyers therefore say that the aggregation clause in the euro-CACs will make them a very potent tool for indebted governments in distress.

Incorporating the new clauses into the Eurozone government bond market will be a slow process, because of the size of the outstanding non-CAC market. Moreover, state treasuries will still be able to fund 45% of next year's borrowing by adding to pre-existing, non-CAC bonds. The percentage of allowed taps falls to 5% of total borrowings in 2023 and beyond.

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