LONDON — Investors holding Portuguese and Irish bonds may find that losses imposed on Greek bondholders are a precursor to their own fate in the next 18 months.
European Commission President Jose Barroso calls the plan for bondholders to forgo about 21 percent on their Greek notes an "exceptional solution which we exclude for others." The cost of insuring Ireland's debt against default now implies a 54 percent chance of default within five years.
"Does anyone really believe that if Portugal or Ireland needed a further bailout, they wouldn't use the Greek template?" said Gary Jenkins, head of fixed income at Evolution Securities in London. "The rating agencies are staring the EU in the eye and saying, 'We don't believe you.' And they're right. Saying this is just for Greece is completely misleading."
After the Greek rescue, both Fitch Ratings and Moody's Investors Service noted the "precedent" it set for future restructurings, and Fitch gave Ireland and Portugal 18 months to get their finances onto a "sustainable path." The two nations are supposed to regain access to capital markets after 2013, and failure to do so "will be incorporated into Fitch's assessment of the risks to bondholders and reflected in its sovereign rating opinions and actions," New York-based Fitch said.
Ireland and Portugal will struggle to grow their economies by enough to reduce their debts to sustainable levels and persuade investors to keep lending, said David Owen, chief European economist at Jefferies International in London. The alternative is a second bailout, which the EU has shown will be accompanied by bondholder losses.
"If we're in a situation where we see that these economies can't recover, then investors will take account of the need for writedowns and price accordingly," Owen said. "The bailout hasn't magically resolved all the issues. There's a flaw in the system, and markets will continue to push at it."
Mid 2013 will be crucial for the European debt markets when the European Stability Mechanism, or ESM, the EU's permanent bailout mechanism, goes into effect. Sovereign bonds issued after that date will have so-called collective action clauses, allowing a majority of bondholders to impose a decision on the minority, as well as requirements that bondholders take losses in a crisis.
The ESM is specifically designed to take the exact actions that Barroso says will be confined to Greece, according to Jenkins at Evolution.
"None of what the politicians were saying made sense," he said. "The crisis could indeed vault over Ireland and Portugal. It all becomes self-fulfilling. Once you force losses on one country, the probability rises that it'll happen elsewhere."