Euro ministers threaten bond market.

European ministers said the plans for making bond holders share the costs of restructuring wouldn’t come in to force until 2013 and so won’t affect bond holders concerned about Ireland’s immanent default.  Seems weak but I don’t thin it is. I think it is clever and gives Euro politicians there first advantage over the bond markets.

I love the way things get worded. It sounds so grown up when in fact it is a long winded way of saying to the bond market, “If you do that again I’ll hit you.”  Sentiments and playground strategies never really change, just the language we dress them up in.

Whatever the language, it says to me, Germany has finally put some backbone into her European partners.  Up till now the bond market has had them running around like spineless cowards. Now the positions are slowly reversing.  The point of the minister’s statement, and the point about 2013, is to say, whatever happens to Ireland and Greece, Spain will be very different boys and girls. The implied threat is – play nice now or lose everything when Spain comes to the bar.

The ministers, led by Germany, have said, let’s all talk like grown ups.  Let’s cooperate and be nice about Ireland and Greece.  We are willing to help but not to be your punch-bag.  That is an invitation for the bond holders to respond in kind and say, ‘yes, let’s work this out’.  If they don’t the Ministers have laid it out that in the future, when Europe’s forth largest economy might need help, then the unkindness will be repaid in hundreds of billions of spades.

The minister and leaders have just bought themselves time and taken it from the bond market.  It is now clear to the market that losses are going to be taken and the mechanism will be put into European law to make sure of it.  That will get priced in starting today.  The pressure on the bond market from that threat will also start to have a salutary effect on the market now, today.  The spread on Irish and Greek debt will not heal. Too late for that, but the bond market may get the message that intransigence now over Ireland may cost them dearly in future so maybe it will be better, albeit kicking and screaming, to play nicer.

I could be quite, quite wrong about this. I am arguing purely from the logic I would pursue if I were a European leader and pinning that to what I hear them saying.