EUR Strangled by Greek SWAP Pick Up

It has been a night of FX consolidation as the market holds its collective breath after three days of market red ahead of Greece’s Bond Swap pick up announcement tomorrow. The Greek government said it will use collective action clauses to compel bondholders to accept its debt restructuring if it receives insufficient consents from investors. There are more than a dozen banks, insurers and hedge funds who have indicated they plan to accept the deal, accounting for at least +EUR45b of bonds (investors with +39.3% of Greek Debt will join the Swap according to IIF this morning). However, there are about +EUR206b of Greek bonds that are eligible for the swap.

Greece has set a +75% participation rate as a threshold for continuing with the transaction. The objective of the whole process, is to reduce by -53.5% the total of privately held Greek debt, helping avert an “uncontrolled default that could roil markets and fuel contagion.” It’s the uncertainty of pick up that has held threat to the various asset classes this week ahead of NFP on Friday. Later this morning, today’s ADP employment data will go some ways to help shape market expectations for the ever important employment report (Actual +216 vs. +204k).

Greece again is trying to wield a hammer of authority from a position of little strength by using veiled threats of default to scare private investors into participation. Its Debt Management Agency said if it got enough support, it intended to make losses “binding on all holders of these bonds” and said the offer was the best deal they would get. In reality, if the country were to miss the March 20 payment without a deal in place and trigger a hard default, global investors would again target the other weak peripheries. The past three days of market losses would pale in comparison to a future onslaught. A default would lead to a hurried exit by Greece from Europe, while at the same time severely test the Monetary Unions stability and existence.

Ideally, Greece wants a take-up of +90% or more. Below the magic number and above +75%, is where things will get sticky and rather messy. Do not be surprised to see the Greek government trigger its use of collective action clauses (CACs) to force losses on all. Below that magic number the deal obviously will be off and market immediately thrown into disarray with the single currency again fighting for its survival. Already this week the currency has had a swipe taken at it on speculation that the country is willing to extend the deadline with things too close to call. Enforcing CAC’s would most likely trigger some CDS payments and at the same time initiate legal action by various bondholders. All of this would only further muddy the waters.

Until the deadline for acceptances tomorrow afternoon, fundamental traders have little to chew on as Greek event risk trumps both the BoE and ECB grandstanding while techies style should be cramped by option barriers.

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