Posted by: Dirk | January 10, 2013

Spanish sovereign bonds – now with default option!

Eldiario.es reports that the new government bonds sold today include a collective action clause, which means that they can be defaulted upon:

Hoy el Tesoro español emite, por primera vez, un bono de referencia a dos años y ,también por primera vez, en la letra pequeña de las condiciones de emisión se incluye la denominada Cláusula de Acción Colectiva (CAC). Se trata de una disposición por la que el Estado se reserva la potestad de cambiar las condiciones de ese título de deuda siempre que cuente con el apoyo de la mayoría de los titulares del mismo y sin la necesidad, como existía hasta ahora, de requerir el consenso de todos los propietarios de la deuda para hacer cualquier modificación.

Wikipedia tells us about collective action clauses:

A collective action clause (CAC) allows a supermajority of bondholders to agree to a debt restructuring that is legally binding on all holders of the bond, including those who vote against the restructuring. Bondholders generally opposed such clauses in the 1980s and 1990s, fearing that it gave debtors too much power. However, following Argentina‘s December 2001 default on its debts in which its bonds lost 70% of their value, CACs have become much more common, as they are now seen as potentially warding off more drastic action, but enabling easier coordination of bondholders.

However, the Spanish constitution says that sovereign debts are repaid before everything else:

“Los créditos para satisfacer los intereses y el capital de la deuda pública de las Administraciones se entenderán siempre incluidos en el estado de gastos de sus presupuestos y su pago gozará de prioridad absoluta. Estos créditos no podrán ser objeto de enmienda o modificación, mientras se ajusten a las condiciones de la ley de emisión.”
European Tribune has translated this in the following way:
Credits to service interest and principal on the public debt of the various Administrations will be understood to be part of the expense account of their budgets, and their payment will have absolute priority. These credits won’t be subject to amendment or modification, as long as they keep to the conditions of the law by which they were issued.

So, my question: is a country a sovereign country if it cannot issue riskless bonds?

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Responses

  1. — it cannot issue riskless bonds? —

    In fact these treasury bonds should be riskless. But the problem is that Spain being part of EU is not as much sovereign as USA is.

  2. […] than with German sovereign bonds, and these have a huge market share in overall financial assets. Since last week, the Spanish sovereign bonds have ceased to be that since they carry collective action clauses, […]


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