The seniority complex

14 August 2012 By Neil Unmack Follow @unmack1

If the ECB wants its bond-buying programme to work, it must reassure investors that it wouldn’t rank above them in a restructuring. But solving that problem could raise another one – accumulated losses for the ECB would amount to massive transfers within the euro zone.

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Mario Draghi, president of the European Central Bank, said the ECB would address investors concerns over the ranking of bonds bought by the ECB in its bond-buying programme. The concerns stem from the ECB’s evasion of losses in the Greek debt restructuring earlier this year, when bonds held by private creditors were forcibly restructured, whereas those held by the ECB with equal legal status were not.
“The Governing Council, within its mandate to maintain price stability over the medium term and in observance of its independence in determining monetary policy, may undertake outright open market operations of a size adequate to reach its objective,” Draghi said at a press conference on Aug. 2. “In this context, the concerns of private investors about seniority will be addressed.”

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