Haircut heaven

25 November 2010 By Neil Unmack Follow @unmack1

Germany wants euro zone sovereign bonds to include clauses enabling debt restructurings as soon as 2011. This would be the first step in a plan to force bondholders to take losses in bailouts. But there s a fine line between creating a fair rescue mechanism, and roiling markets.

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A German government paper proposes that euro zone governments include collective action clauses in their bonds from 2011 onwards, as part of a broader plan to establish a sovereign default resolution mechanism in the euro zone.

"Have politicians got the courage to make those that earn money share in the risk as well?" German chancellor Angela Merkel said on Nov. 24 in a speech to the German parliament. "Or is dealing in government debt the only business in the world that involves no risk?"

The task force of headed by European Union President Herman van Rompuy will present a report on a new European crisis resolution mechanism to replace the existing rescue fund, called the European Financial Stability Facility, which expires in 2013, at a European Union summit in midDecember.

Spanish Finance Minister Elena Salgado said Nov. 24 it was too early to talk of the implementation of a crisis resolution mechanism that would force losses on bondholders. "We don't think this idea is quite appropriate right now," Salgado told Reuters in a telephone interview.

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