Much Maligned Bondholders Do God's Work; ECB Creates Incentive to Gamble

Thanks in part to European Central Bank President Jean-Claude Trichet, German Chancellor Angela Merkel's proposal to make bondholders suffer losses from poor investment decisions was shoved aside.

Said ECB president Trichet in an exclusive interview...

"This is a victory for much maligned bondholders everywhere. I am pleased to announce we have effectively removed the word investing from the vocabulary of bondholders."

"Starting today, bondholders need not be concerned with who they lend money to, why, or what risks there are in doing so."

"Not only will this help ease turmoil in the markets, but bondholders can now think in terms of winning rather than the more mundane investing because the ECB and IMF will backstop all losses from trading bonds."

The above is a translation from today's issue of Le Monde. An official transcript will appear on the ECB's website later today.

In the meantime, Bloomberg has a few sketchy details of the announcement in an article appropriately titled Germany Drops Bond Threat

European governments sought to quell the market turmoil menacing the euro, handing debt-strapped Ireland an 85 billion-euro ($113 billion) aid package and diluting proposals to force bondholders to cover a share of future bailouts.

European finance chiefs ended crisis talks in Brussels yesterday by endorsing a Franco-German compromise on post-2013 rescues that means investors won’t automatically take losses to share the cost with taxpayers as German Chancellor Angela Merkel initially proposed to the consternation of bond traders.

The first test of the twin decisions come today with markets resuming trading after speculation intensified last week that Portugal and perhaps even Spain will require external support. In a third move, Greece was told it could have an extra four-and-a-half years to repay emergency loans totaling 110 billion euros to match the seven-year term under Ireland’s deal.

The German push ran into criticism from policy makers elsewhere, who called it mistimed, and from European Central Bank President Jean-Claude Trichet, who warned it would unsettle bondholders. Germany yesterday backed away from the pitch for an automatic penalty, agreeing to give the International Monetary Fund a role in determining losses on a case-by-case basis.

Bondholders Do God's Work

In a followup interview Trichet commented, "The debt crisis is over. We are willing to grant Greece and Ireland as much time as they need. If an extra-four-and-a-half years to repay emergency loans proves insufficient, we are willing to wait an extra-hundred-and-a-half years".

When asked if he meant 150 years or 100.5 years, Trichet replied, "I mean as long as it takes to make the ECB whole, forever if necessary. The important thing is for bondholders to never suffer losses. Heaven forbid we should ever unsettle bondholders by insinuating they may have to take some losses. Bondholders in general, not just Goldman Sachs bondholders, do God's work."

Incentive to Gamble

Please consider ECB's Noyer assures cagey markets over Ireland rescue

Noyer, the first member of the ECB's policy council to speak after euro zone ministers sealed an 85 billion euro ($115 billion) loan package for Ireland on Sunday, said he was confident the deal would bring down Dublin's borrowing costs to more normal levels.

"There is no reason to doubt the recovery plans of the two countries," Noyer said in a speech in Tokyo, referring to Ireland and Greece.

The new European Stability Mechanism outlined on Sunday would make private investors share the pain in the case of a debt default or restructuring, but it would apply only to debt issued after 2013.

Noyer, who is also governor of the Bank of France, said that he believed even then it should remain only a theoretical possibility.

"As far as I'm concerned, I exclude that there will be haircuts in the future."

Lovely. Just lovey. If there is no possibility of haircuts, why shouldn't banks invest in the riskiest garbage there is?

In fact, fools like Trichet and Noyer are effectively saying there is no such thing as risky garbage, only misguided perceptions of risky garbage.

The thing is they are lying, hoping to calm the markets. If their lies work at all, they won't work for long.

Addendum:

Several people have asked for confirmation of those Trichet quotes. I guess I need to be even more outrageous. Those quotes of Trichet were a spoof.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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