Europe opens the floodgates to debt restructuring

There are no doubt plenty of reasons for further downgrading Portugal’s sovereign debt, but in confirming such a downgrade on Tuesday, Standard & Poor’s made clear that the primary cause was the concluding statement of the European Council meeting of March 24-25. This confirmed that (i) sovereign debt restructuring is a potential pre-condition to borrowing from the European Stability Mechanism (ESM), and (ii) senior unsecured government debt will be subordinated to ESM loans.