The Eurozone must address serious structural issues in collective action clauses (CACs), HSBC chairman Robert Gray has warned.
CACs are voluntary and market-based instruments, allowing a set majority of bondholders to force through terms of a restructuring. The Eurozone is embarking on a project to introduce standardised CACs from January 1 2013.
But it remains unclear whether the clauses will be enforceable in their particular jurisdiction.
Speaking at the International Capital Market Association’s (ICMA) annual conference last week, Gray the move would prompt a transition problem. “These clauses will apply in new bonds from next January, but that doesn’t address the issue of old bonds outstanding for many years,” he said.
Additionally, it remains to be seen whether governments will be tempted to take a leaf out of the Greek book and retroactively introduce these clauses into existing stock.
There is practical uncertainty too around whether, once the reforms come in, governments will actually use them in debt restructurings.
“In the Greek case, one of the virtues of the use of the clauses is that they triggered credit default swaps (CDS),” said Gray, who chairs HSBC’s debt financing and advisory department. But, he added, there was a widespread fear in the market that the EU authorities did not want to see the CDS triggered.
Gray also questioned whether preferred creditor status should be granted to any bonds purchased in the secondary market, rather than representing new funds from the sovereign debtor.
In cases where preferred creditor status is asserted at the time the restructuring takes place, there is a complete lack of transparency about the holdings.
Preferred creditor status is always granted to loans from the International Monetary Fund and will also apply to loans from the European stability mechanism, when it comes into force.
In the case of Greece, special treatment was given to bonds held by the European Central Bank, the national central banks and the European Investment Bank.
“The only other take away from Greece is what are the implications for the private sector being the holder of a sliver of debt in a country that has such a dependence on the official sector,” said Gray.
75% of Greece’s debt is held by the official sector.
Speaking at the same conference, Thomas Mayer, Deutsche Bank’s chief economist said he believed Greece would take a breather and step out of the euro.
Meanwhile, Gray also called for the introduction of sovereign bond reforms that would make it easier to see the terms and conditions of local law.
European sovereign bonds do not currently produce offering circulars or any other form of disclosure, as they are exempt from the EU prospectus directive.
More uniform protections between debtors’ international law bonds and local law bonds were needed, said Gray.
“All sovereigns should include the terms and conditions of all their outstanding bond issues in the English language on their website,” he said. “This kind of development in disclosure would help improve cross border capital flows.”
Michael Ridley, managing director at JP Morgan believed that greater transparency in the bond market was absolutely essential to ensure the continued smooth functioning of the markets.