The markets took fright of the ongoing euro zone sovereign debt crisis yesterday with the S&P500 in New York registering its biggest one day loss of 2012 to date as risk came off the table. The big winner in currency terms was the US dollar which rose sharply across the board as investors piled in for its safe haven qualities.
Nerves about the Greek private-sector bond swap and global growth prospects dampened risk appetite.
Eurostat, the European Union’s official statistics office reported yesterday that the euro zone economy expanded by a less than expected 0.4% in the fourth quarter of 2011 and that the euro zone’s economy contracted by 0.3% quarter-on-quarter (+0.7 percent year-on-year) in the fourth quarter of 2011.
“The euro zone’s fourth quarter figures make it evident that the European economy is slowing down. GDP for the four biggest economies in the region, Germany, France, Italy, and Spain all showed negative quarterly growth except for France. Both Greece and Portugal are already in a recession.” was the consensus view from analysts.
To add to growing concerns about the situation in Greece, the Institute for International Finance (IIF) warned yesterday of the potentially large risks that could arise from a debt default by Greece.
The private document was leaked to Reuters and states “there are some very important and damaging ramifications that would result from a disorderly default on Greek government debt (…) it is difficult to add all these contingent liabilities up with any degree of precision, although it is hard to see how they would not exceed €1 trillion.”
More specifically, it states that even the European Central Bank’s capital base could be impaired and, apparently (it is not at all clear), that most of the countries of the European periphery could require further help, to the tune of another €730 billion. Of that amount, €350 billion would be for Spain and Italy in the case of a ‘disorderly’ default.
This is pertinent because one of the conditions for Greece’s second €130 billion rescue package to go ahead was that Greece reaches an agreement with its private bondholders (known as PSI) on a debt exchange. The “final agreement” reached was that PSI would accept a “voluntary” haircut of 53.5% on its holdings implying “real losses” somewhere above 70%. Thursday is the deadline for the private creditors to accept the deal in order for Greece to qualify for the bailout as there is the small matter of a €14.5 billion bond repayment due on 20 March.
The Greek government has said they require a 75% acceptance rate in order to proceed with the transaction, though they would hope to get holders of more than 90% of its debt to take the offer. Since the Greek government recently passed the controversial CACs (collective action clauses that force bondholders to accept the deal if participation is not high enough), the final percentage seems to be little more than a moot point.
Indeed, Greek Finance Minister, Evangelos Venizelos, said yesterday that this deal was the “one and only” and made it very clear that he would not hesitate to activate the CAC laws.
So far the International Swaps and Derivatives Association (ISDA) does not consider the current “agreement” to be a credit event. This means that credit default swaps – used as insurance against non-payment have not been activated.
In any case, UniCredit chief economist Erik Nielsen thinks enough bondholders will participate in order to avoid an activation of the CACs. Of course, it was just a few days ago that the Chief Executive Officer of Commerzbank declared that, precisely due to those CACs, the deal was “about as voluntary as confessions were during the Spanish Inquisition”.
Together with China proclaiming that it plans only single digit growth in 2013, market sentiment has turned decidedly negative hitting the high yielding commodity based currencies like the Australian dollar and South African Rand and boosting demand for the US dollar.
Compiled by Tony Redondo
