WASHINGTON (MNI) – The following text is a statement Monday by
Standard & Poor’s assessing the outcome of the EU leaders summit over
the weekend and its impact in bondholders:

Standard & Poor’s Ratings Services said today that the conclusions
reached by the European Council (EC) on March 11, 2011, regarding the
workings of the European Stability Mechanism (ESM) appeared to confirm
Standard & Poor’s earlier expectations that two key features of the ESM
could be detrimental to holders of government bonds issued by sovereigns
requiring funding from the ESM, once the latter starts operations in
mid-2013.

First, the EC’s post-meeting statement appears to confirm our
expectation that the ESM, as currently proposed, will impose conditions
on loans to sovereigns, including the right to require a sovereign
borrower to restructure its market securities with a view to improving
debt sustainability. The post-meeting statement provides: “For countries
considered solvent, on the basis of the debt sustainability analysis
conducted by the Commission and the IMF, in liaison with the ECB, the
private sector creditors would be encouraged to maintain their exposure
according to international rules and fully in line with the IMF
practices.

In the unexpected event that a country would appear to be
insolvent, the Member State has to negotiate a comprehensive
restructuring plan with its private sector creditors, in line with IMF
practices with a view to restoring debt sustainability. If debt
sustainability can be reached through these measures, the ESM may
provide liquidity assistance.”

As a credit matter, Standard & Poor’s is of the view that this
provision, if definitively implemented, would give the ESM the right to
require a sovereign borrower to restructure its government bondholding
debt with a view to improving debt sustainability. Such lending
conditions would likely have rating consequences for holders of
government bonds issued by sovereigns borrowing from the ESM.

Second, the post-meeting statement reiterated the intention that
the ESM would benefit from “preferred creditor” status: “Rules will be
adapted to provide for a case by case participation of private sector
creditors, fully consistent with IMF policies. In all cases, in order to
protect taxpayers’ money, and to send a clear signal to private
creditors that their claims are subordinated to those of the official
sector, an ESM loan will enjoy preferred creditor status, junior only to
the IMF loan.”

As a credit matter, Standard & Poor’s is of the view that this
provision, if definitively implemented, would subordinate holders of
government bonds to the ESM and the IMF. Such subordination would likely
have rating consequences for holders of government bonds issued by
sovereigns borrowing from the ESM.

We expect additional details about the ESM to emerge following the
EC meetings at the end of March. We will analyze particulars of the ESM
when available before reaching a further conclusion on the potential
effect of these two features on the ratings of affected Economic and
Monetary Union (EMU) sovereigns.

We have previously stated that these possible credit implications
will not affect all EMU sovereigns equally, but only those we consider
to be potential borrowing clients of the ESM. We continue to believe
that Portugal (A-/Watch Neg/A-2) and Greece (BB+/Watch Neg/B), given
their high external financing need in the next few years, will be the
most likely candidates to approach the ESM for funding.

** Market News International Washington Bureau: 202-371-2121 **

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