Download ECB move `may hurt investors`

20
Gulf Daily News Saturday, 27th September 2014
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ECB move ‘may hurt investors’
LONDON: A large-scale bond-buying programme by the European Central Bank
(ECB) could increase losses for investors if
the euro zone had to write down public debt
again, according to a lawyer who advised
bondholders in the 2012 Greek debt restructuring.
Investors have been loading up on euro
zone government debt this year, anticipating
the ECB will buy the bonds to pump money into the stagnating economy, the process
called quantitative easing (QE).
But if the ECB claims preferential creditor status for its scheme, as it did during the
Greek restructuring, private investors would
face greater haircuts on any future defaults
because the ECB would demand to be paid
in full.
“QE raises the question of treatment,” said
Yannis Manuelides, a partner at the law firm
Allen & Overy. “The ECB couldn’t start a
massive operation without having a statement on this because every euro intervention
would be seen to be aggravating the problem
for everybody else.”
The assumption in markets is that the
ECB, which has no preferred creditor status officially, will be on an equal footing
with private investors in any bond-buying
scheme. But German officials have cautioned against any move which violates a
LONDON MARKETS
Gold (per ounce)
$1,213.75
Silver (per ounce)
$17.54
Palladium$802.00
Platinum$1,304.00
(Three-month delivery)
Aluminium ($ per tonne) 1,927.00
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BOMBAY
Gold 24K (per gram)
Gold (10g)
Silver (1kg)
Rs2,398.62
25,156.18
39,120.00
Oil delivery prices (in dollars per barrel)
September 26
(close)
IPE Brent
$97.00
Nymex crude
$92.53
held the Greek bonds for public policy purposes and not to profit.
He also said the ECB’s waiver of preferential treatment in the OMT programme was
not as straightforward as it sounded. That
programme requires a country to accept a
bailout with strict conditions for reform,
which minimises the risk of debt restructuring. No such conditions are likely to apply
to QE.
Even so, investors expect the ECB to
waive seniority for QE.
Myles Bradshaw, European strategist at
the world’s biggest bond investor PIMCO,
said the justification the ECB used to protect
itself against losses in Greece’s emergency
debt restructuring should not apply to QE,
because it would be a monetary policy tool
that applied to all countries.
Germany’s Bundesbank head Jens Weidmann has also said buying assets to beat
inflation was different, though he still had
reservations about monetary financing.
If the ECB did claim seniority, it could
stymie private sector investment in government bonds, effectively rendering its biggest
policy weapon a dud.
“It opens up a Pandora’s box, and the
ECB would be well advised to keep that box
closed and to be pari passu with investors,”
Bradshaw said.
Sensex-Nifty post gains
MUMBAI: The BSE Sensex
and Nifty rose yesterday to
snap a three-day losing streak
as rate-sensitive stocks such
as IDFC Limited jumped after
Standard and Poor’s raised India’s sovereign credit outlook
to “stable” from “negative”.
The S&P said the government mandate and improved
political setting offered a
conducive environment for
reforms in Asia’s third largest economy. It cited India’s
external position and improving current account balance
among other positive factors.
S&P added it could raise India’s rating should the country
revert back to a real per capita
gross domestic product of 5.5
per cent per year, and if its fiscal, external and inflation metrics improve.
However, the benchmark
indexes marked their
first weekly fall in
seven due to concerns
over the Supreme
Court’s scrapping of
most coal block allocations since 1993,
the government delaying an increase in
gas prices and foreign investors selling in each of the last
three sessions.
“S&P underlines govern-
ment’s efforts in stoking the
economy but Prime Minister
Narendra Modi needs to continue the reform cycle without any lag,” said U R Bhat,
managing director at Dalton
Capital, a unit of UKbased Dalton Strategic Partnership that
has nearly $2 billion
of assets.
The
benchmark
BSE Sensex rose
0.6pc, or 157.96
points, to end at
26,626.32, while falling 1.7pc
for the week.
The broader Nifty rose
0.72pc, or 57 points, to end at
D
I
L
B
E
R
T
Currency
September 26
Previous
Euro 1.26851.2740
Yen
109.30108.80
Swiss francs
0.9512
0.9472
Canadian dollars
1.1162
1.1107
Pound 1.62471.6302
Gold bars
Selling
Rates are in Bahrain Dinars
8gm coin 22k
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8gm coin 21k
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1gm (24 carat)
17.000
2.5gm41.000
5gm78.000
10gm153.500
20gm302.500
50gm750.000
100gm1,494.500
1 ounce
468.000
1 tola
177.500
5 tola
871.000
10 tola
1,727.000
1kg14,735.000
1kg silver
237.000
1/2kg silver
119.500
•
Courtesy
Bahrain
Express
Exchange Tel: 17-275-275
ban on the ECB funding governments and
exceeds its mandate.
The ECB declined to comment.
The ECB did waive seniority for a
bond-purchase programme, known as Outright Monetary Purchases (OMT), it announced in a bid to save the euro in 2012,
when it looked as if the currency union might
break up. The programme eased near-term
default fears, but it was never used and faces
a test in European courts next month after
being challenged by German legislators.
The ECB’s attention has since turned to
stubbornly low inflation, which is hampering the bloc’s recovery and preventing weaker countries from improving their long-term
debt sustainability.
To stave off deflation, the ECB appears to
be warming to the kind of QE programme
the US Federal Reserve and the Bank of England used in the depths of the global crisis.
The Fed and BoE were spared the ECB’s
headache, however, because they are permitted to finance their governments if necessary.
Manuelides has first-hand experience of
how determined the ECB can be to protect
itself against losses.
Representing private investors in the
Greek restructuring, he said he “complained
bitterly” when the ECB argued for its preferred creditor status, on the grounds that it
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7,968.85, marking a weekly
fall of 1.9pc.
Both the indexes marked
their biggest weekly declines
since August 1.
The gains were led by
rate-sensitive stocks. The NSE
Bank index rose 2pc, marking
its biggest daily gain since August 18.
IDFC rose 3pc, while Axis
Bank ended 3.1pc higher.
Punjab National Bank rose
2.9pc, while State bank of India gained 2.8pc.
DLF gained 4.5pc, Tata
Motors advanced 1.3pc.
Hindalco Industries gained
5.4pc on value buying after
slumping 9.2pc over the previous four sessions.
Sun Pharmaceutical Industries gained 4.2pc, marking its
biggest single-day gain since
August 20 on speculation of
lower chances of an import
alert for a unit.
However, among stocks
that fell, Petronet LNG declined 3.7pc after Asian Development Bank launched a
share sale in the gas supplier
to raise up to $120 million.
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