New European support mechanism could trigger CDS, says Nomura

Nomura interest rate analysts point out in a research note today that the introduction of the European Stability Mechanism, the replacement for the European Financial Stability Facility, could – at least in theory – trigger a credit event under credit default swaps on all European Union sovereigns. Although no documentation for the new scheme has been issued, officials have talked about the ESM as having “preferred creditor” status. As Nomura points out, any explicit seniority for the ESM would mean existing bonds being subordinated, which is one of the credit event triggers under “restructuring”.

However, European Union officials may be smart enough to avoid triggering such a large volume of credit default swaps. The report goes on to point out that EU bilateral loans to Greece were given effective seniority over other Greek sovereign debt, but seniority was not mentioned explicitly in their terms.