Bondholder bailout

3 April 2009 By Hugo Dixon Follow @hugodixon

Although it isn’t spelt out, that s the implication of one of their papers and confirmed by knowledgable people. Regulators are too afraid of the knockon effects of even subordinate debt defaults. The quid pro quo is that such debt will, in future, not count as capital.

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The G20 doesn't want bank bondholders to suffer any further defaults during this crisis, three people involved in global financial crisis management have told breakingviews. The authorities are afraid that such defaults could cause knockon effects in the financial system, especially on insurance companies, which hold much bank subordinated debt.

The treatment of bondholders contrasts with the G20's approach to shareholders. When G20 finance ministers met on 14 March, they said: "Banks' shareholders should be required to contribute to the maximum extent possible to loss or risk coverage prior to government intervention". The annex to the communiqué made no mention of bondholders.

In return for protecting bank bondholders during this crisis, such subordinated debt is unlikely to count as capital in future, one person involved in crisis management told breakingviews. The G20 leaders issued a declaration on strengthening the financial system last week. It said that once the economic recovery is assured, the "quality of capital should be enhanced".

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