So far, despite the sluggish developments in Athens, sentiment has remained intact, with markets displaying patience and EURUSD rising above $1.30. “This indicates that investors believe that EU policymakers will eventually spring into action and either agree to a solution to the PSI issue as soon as possible or take drastic action to negate the effects of a Greek default, if it were to happen,” said Kathleen Brooks, strategist at Forex.com.
The problem remains that eurozone and IMF officials consider larger levels of PSI, upwards of 70%, would be necessary to bring the Greek debt-to-GDP ratio to sustainable levels. However, many private creditors, who make up approximately 25% of Greek debt holders, are unlikely to take part in such a deal.
Several large hedge funds that bought up big stakes of Greek debt at knockdown prices now hold a high percentage of debt for some issues and thus have greater sway in any discussion of the terms of a voluntary write-down.
Indeed many of these funds are now adequately insured against any form of default through credit default swaps, such that they have little incentive to agree to any negotiations on the restructuring of Greek debt, according to one analyst.
If a deal is reached, the key issue will be the participation levels, which if insufficient will leave Greece’s fiscal situation in a continuing precarious state.
Furthermore, it will be difficult to characterize what constitutes voluntary and involuntary write-downs.
“Even if an agreement is forthcoming, it is likely to be seen by the ratings agencies as a default, with all the implications that would have,” said Simon Derrick, strategist at Bank of New York Mellon.
“There is now a reasonable prospect that Greece will experience a disorderly default on March 20 – its first redemption payment date this year – and, quite possibly, an exit from the eurozone.”
However, traders in the currency market should be wary of a short squeeze following an announcement that any sort of deal has been arranged, as the removal of uncertainty is likely to be well received by the markets.
“EURUSD looks to be backed by a strong technical bounce we saw last week, and combined with the fact funds are still short, according to the latest CFTC data, we could take a shot through 1.3100,” said Maurice Pomery, CEO of Strategic Alpha.