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So much for pari passu as senior bondholders get dragged into Greek bank recapitalization

By hook or by crook, senior bondholders are in line to help plug the €14.4 billion capital gap that the ECB’s asset quality review and stress test revealed in Greek banks’ balance sheets.

For a while, after the ECB said in July that Europe’s Bank Recovery and Resolution Directive would only be applicable in Greece from 2016, it seemed as if officials had decided that it would be cheaper to find other ways to pay for the latest Greek bank bailout than to risk a punch-up with the bond market.

But a law passed Oct. 31 to frame the recapitalization of the banks will permit senior bonds to be converted into equity without triggering a default. This allows officials to sidestep the problem of €49 billion in government-guaranteed bonds that had ranked pari passu with senior debt.

"The law that was just passed allows almost anything," Andreas Koutras, from fixed-income consultancy Valere Capital in London told SNL on Nov. 2. "A senior bail-in could happen without respecting order or pari passu."

With the stick of the new legal framework now hanging over debt investors, National Bank of Greece SA took the opportunity to proffer them a carrot Nov. 2, offering to swap €803 million of senior and junior bonds for shares. The other three main Greek banks had already launched bond swaps, taking the total on offer to €3.4 billion.

Senior bondholders are anyway exposed to what has been euphemistically dubbed "burden sharing" once BRRD is enacted, as the rules call for struggling banks to bail in 8% of their liabilities before being liable for official aid money. But so far, Europe’s senior debt investors have escaped unscathed, even in cases such as the collapse of Banco Espírito Santo SA in Portugal.

Next Finance , November 2015

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