The wheels are in motion as the ECB undertakes to swap out its holdings of Greek bonds. By doing so, it insulates itself against the prospect of collective action clauses being put retroactively into Greek bonds in order to force write-downs on those holdouts in the PSI negotiations.
From Bloomberg: “The Frankfurt-based ECB is exchanging its Greek bonds for bonds of an identical structure and nominal value, the only difference being that they would be exempt from so-called collective action clauses, the officials said late yesterday on condition of anonymity. One said the bonds have a face value of about 50 billion euros ($65 billion).
An exemption from collective action clauses, or CACs, would mean the ECB would not have to participate should the Greek government impose involuntary losses on bondholders. That may occur if not enough private creditors agree to a voluntary swap.”
The ECB paid less for those Greek bonds as they were bought under distress. If held to maturity the ECB would reap the difference between the price it paid for the bonds (around 40 billion euro) and their estimated face value of about 55 billion euro (this figure according to FT), plus interest. That 15 billion euro difference could be used to help push along the PSI deal, or to fill a gap in the funding for the 2nd Greek bailout.
The key issue to consider going forward is that by taking this action to swap its bonds, the ECB is the issue of subordinating other creditors bond holdings, an issue that is applicable beyond Greece.
From Bloomberg: ““The risk of a voluntary restructuring morphing into a coercive one has arguably increased significantly,” Walker said. “It may appear that the ECB is receiving preferential treatment, raising questions about whether the ECB is senior to private sector bondholders, not only in the case of Greek debt, but also regarding the debt of other euro-zone nations that the ECB may be purchasing.
“A private sector bondholder that has been suddenly and unexpectedly subordinated may have a reduced incentive to continue to hold onto that debt,” he said.”
This issue of subordination can come back to haunt the EUR, after the “relief” of Greece getting its 2nd bailout work their way through the markets as it could imply increase pressure on the sovereign bond markets of Portugal, Ireland, Spain and Italy.
For now, the cautious optimism heading into the weekend that the European nations will not allow Greece to default have extended the gains seen yesterday after it was announced that Greek and the Eurogroup had agreed to extra savings and Greek politicians sent assurances that they would stick to austerity measures even after April elections.
With a holiday in the US on Monday, the EUR may be benefiting from those investors and traders that do not want to be short EUR ahead of a possible resolution of the Greek situation. Things can change if new complications arise, but for now the current signs point to progress on PSI with these most recent moves by the ECB.
For a technical analysis look at the EUR/USD, see today’s technical update: EUR/USD Attacks Counter-trend Trendline
To gain free access to live market intelligence briefings where we discuss risk and trade management as well as the fundamental backdrop for key currency pairs, register here at IBTrade.
Nick Nasad is an analyst, educator, and trader; and one of the main contributors to FXTimes – provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.
Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.
