ESM will not have preferred creditor status

News organisations are reporting the European Stability Mechanism will not have IMF-style preferred creditor status for countries already in a bailout after all, which is a significant change from the draft treaty setting out the planned design of the fund.   Some reports here: FT; Irish Times; Reuters.

It has been apparent from the timing of spikes in bond yields, as well as from investor/rating-agency reactions, that features of the ESM’s design are considered impediments to Ireland regaining its creditworthiness.   The annoucement is therefore welcome news, though the limited initial falls in bond yields suggest it is not a panacea (see here).  Greater clarity about future debt-sustainability tests and also the form of future private sector involvement are important additional steps.   Greece-related developments are likely to be the main market movers for the time being.