Bank of England analysts back sovereign cocos

Tim Wallace
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GOVERNMENTS should copy banks and issue contingent convertible bonds (cocos) – debt instruments which ease the burden on borrowers if the sovereigns get into financial difficulty – a Bank of England paper proposed yesterday.

The maturity dates on the bonds would automatically be extended when the government takes a bailout, easing the immediate pressure on their finances.

And it would avoid much of the wrangling with private sector creditors which took place around the Greek bailouts, where no terms and conditions on how to cope existed.

“If the maturity of Greece’s sovereign bonds had been extended ahead of its International Monetary Fund and EU programme, this would have significantly reduced the size of

official sector support from €110bn (£68bn) to less than €45bn,” the report estimated.

“By reducing the size of official sector intervention, sovereign cocos could significantly reduce the risk to global taxpayers and make it easier to negotiate a debt restructuring in the event of insolvency.”

The authors, Martin Brooke, Rhys Mendes, Alex Pienkowski and Eric Santor, also believe the move could put more pressure on governments to keep their finances in line.

The analysts believe the instruments could be more sensitive, sending interest rates up more sharply if investors had concerns about the state of the government’s finances, bringing more market discipline to the borrowers.

However, the Bank of England paper acknowledges the scheme has some downsides.

Cocos would not help a government that was entirely insolvent pay its bills, while the price of borrowing would also be expected to rise as the instruments may be viewed as riskier than standard bonds.