Euro Tumbles As CACs Call Could Trigger Default, Credit Default Swaps
THE TAKEAWAY: [Greek Government Activates CACs] > [Concerns of outright default triggering credit default swaps; ISDA decision on credit event pending] > [EURUSD tumbles]
By this morning, 85.8 percent of Greece’s private sector creditors had agreed to participate in Greece’s historical debt-swap deal. With such a high participation rate, the Greek government announced that it has activated the collective action clauses (CACs) that would lift total participation to 95.7 percent.
Of the 177 billion euros of bonds written under Greek law, private creditors tendered 152 billion euros of their bond holdings for new securities, essentially agreeing to undergo a 53.5 percent hair cut on the face value of the bonds. In triggering the CACs, Greece will force unwilling bondholders into the private sector involvement (PSI) deal and enforce net present value losses of about 75 percent on those investors. Furthermore, Greece will include a restructuring of some 20 billion euros held by investors in Greek bonds that are not written under Greek law in a bid to reduce its debt by more than 100 billion euros to satisfy the Eurozone and International Monetary Fund (IMF) that the haircut has been large enough to justify a second bailout, which will be worth 130 billion euro.
EURUSD 5-min chart: March 9, 2012
Chart created using Strategy Trader– Prepared by Tzu-Wen Chen
Following the Greek government’s announcement, Fitch downgraded Greece’s ratings to ‘restricted default’ from ‘C’. The activation of CACs revived market fears that this would result in an outright default and trigger Credit Default Swaps (CDS) which could see some creditors taking legal action against Greece. The International Swaps and Derivatives Association (ISDA) committee convened today, and it is widely anticipated that the ISDA will make a decision today or early next week confirming that a credit event has taken place.
The euro weakened against all major currencies on the renewed market concerns, with the EURUSD pair falling from an intra-day high of $1.3270 in early U.S. trading towards 1.3110 levels.
--- Written by Tzu-Wen Chen DailyFX Research
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.