End of the Greek debt saga?!

It has been quite a quiet week for the euro, the only significant move came on Thursday, when the euro strengthened across the board in anticipation of a successful outcome to the Greek bond swap. This morning the euro was a half cent firmer on the week against both currencies.

The Greek debit crisis is still the markets’ main focus. The Greek bond swap deadline for investors’ participation was set for Thursday evening. One condition of the EU’s second bailout for Greece was that the country should reach an agreement with private sector holders of government bonds in which they would “volunteer” to write off a portion of what they were owed. Investors would exchange old bonds for new ones with half the face value at lower interest rates for longer maturities.

When the deadline passed on Thursday evening it looked as though about 75% of investors had decided to participate, enough to make the exercise a success. By Friday morning participation had risen to 95.7% because the Greek government had taken advantage of “collective action clauses” (CACs) which allowed it to force the non-volunteers to take their losses with the rest.

The market is waiting to hear the decision of the International Swaps and Derivatives Association (ISDA) committee which will decide whether the use of CACs amounts to a “credit event” – colloquially known as a default. If it does, some bondholders will be able to take advantage of the “credit default swaps” (CDS) which they purchased previously as protection against Greece’s failure to repay its debts.

During the days preceding the deadline investors became steadily more optimistic that the debt swap would proceed smoothly. That growing confidence was positive for the euro, which peaked at the moment on Thursday evening when Athens announced a done deal. It was a different matter 12 hours later when the Greek authorities declared they would use the CACs to compel participation by non-volunteers. Investors were uncertain whether this was a good thing; would it validate the CDS “insurance policies”, or will the ISDA committee fail to declare a credit event.

There are clearly mixed sentiments among investors. On the plus side, the biggest ever sovereign debt restructuring has gone through without too much turbulence and Greece has been let off €100 billion of its obligations. However nobody is under any illusion that this is the end of the saga.

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