A large-scale bond-buying programme by the European Central Bank (ECB) could increase losses for investors if the Eurozone 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 Eurozone 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 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 2012, when it looked as if the currency union might break up.
The programme eased default fears but was never used. It will be tested in court next month after German objections.