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The outcome of events in March could spell the very survival of the world’s second favorite reserve currency, the euro.
At the top of the worries list is a key decision on whether or not to force creditors to accept the retroactive collective action clause imbedded in the Greek debt swap. If that occurs, the International Swaps and Derivatives Association must decide if such an event will trigger credit default swaps.
If the ISDA fails to trigger CDS after the CACs, the collective action clause, are forced on investors, peripheral debt across the board is likely to suffer dramatically–which will stir the bank liquidity debate up once again. There’s also a risk that a systemic bout of contagion occurs as banks are forced to payout on Greek bond insurance contracts.
I am not making any predictions, at least publicly about the outcome, but it’s clear the markets’ desire to embrace risky assets seems a bit optimistic given just this headline risk, not to mention what else is in store for the weeks to come. Also this month, we’re likely to learn the date on which Ireland will hold a referendum on the EU fiscal compact agreed upon in December. The latest poll shows Irish voters in favor of the treaty change by a slim margin of 40% “yes” to 36% voting “no,” with a whopping 24.5% undecided.
Spanish Prime Minister Mariano Rajoy is seeking support from other leaders within the euro zone to relax deficit targets on Spain, a country struggling with austerity in the midst of one of its worst recessions in years. A relaxation for Spain, which also could come this month, will set the smaller nations in the periphery, Ireland and Portugal primarily, on a course for similar adjustments to austerity measures.
And next week begins a slew of economic data which will either confirm or deny current economic trends beginning with a reading on manufacturing in the euro zone, followed by such data as second quarter gross domestic product estimates, to the U.S. employment report.
Throw in an European Central Bank rate decision and press conference to follow and the pot could begin to boil. There is some good news. While the official decision to release the funds for Greece’s second bail out will not come until next Friday, the decision appears all but rubber-stamped and that will take some of the pressure off the euro.
Of course this is a decision being made by EU finance ministers–anything can happen.
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I understand us banks have 50 billion in CDs exposure to Greece and 500 billion to all the piigs. That is substantially more risk than the trigger that lead to the 2007/8 bank hortor show. In my view when ikb could not roll its commercial paper in June of 2007 that ANd the other troubled German banks were no more than 80 billion of mbs dumping combined. But yet by August of 2007 they had killed the commercial loan securitization mkt and the mkt to mkt effect dragged down the whole system. Why is this not worse? I don’t believe the eu banks are in better shape.
“There's also a risk that a systemic bout of contagion occurs as banks are forced to payout on Greek bond insurance contracts.”
There is also a risk of contagion resulting from a failure to make good on CDS contracts which will be twofold, a collapse of the CDS market followed by shrinking demand for sovereign debt that is un-hedgeable.
If they do not beware the Ides of March, and get some austerity relief and growth, the tutonic Ceasar will likely have the knives of the other eurozone Senators sticking out of her. Et tu brute.
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