Jim Leaviss: five things bond investors learnt from Greece

M&G Investments' head of retail of fixed interest Jim Leaviss underlines the five things he's learnt from the Greek debt crisis.  

* The price charged by central banks for saving the world is seniority

The ECB did not take haircuts on the Greek debt it had bought as part of its SMP bond buying programme. Did you spot the clause in your bond documents that said that you were buying the subordinate tranche of the government bond market? Of course it never existed – in extremis, which is exactly where we are – the law is torn up and rewritten (see point 2).

Historically you wouldn’t have worried too much about being subordinate to the authorities, but that was before the age where over a third of the gilt market is owned by the Bank of England, and where the Fed owns large portions of both the Treasury and mortgage markets.

Given sovereign recoveries have been below 40% on average (in the world before QE) if 40% of the outstanding bonds are now senior to private sector holdings of government debt, that leaves much less for investors. Recoveries will be lower going forward.

* The ECB is an anti-democratic institution – thank goodness.  

The Eurozone cannot cope with crises through its democratic structures. Treaty changes are needed for even modest increases to fiscal union, and treaty changes require referendums (Ireland’s referendum on the Eurozone fiscal pact announced this week will take three months to organise. It may well not pass, and hence any one member state can stop integration).  

The anti-democratic organisation can therefore be the boy with his finger in the dyke. But think of the ECB as the pain-killer, treating symptoms rather than dealing with the illness. Only democracy will be able to deliver the surgery that is fiscal union.