EUR USD (1.4245) Eurozone finance ministers announced early this morning that they will endorse a voluntary rollover of Greek debt by private bondholders, effectively rejecting Germany’s suggestion to arrange a swap deal. In a sense, these private bondholders are thus cast into a prisoners’ dilemma, where the individual is incentivised not to participate in the rollover if everyone else does. However, if nobody participates, then all would stand to lose. The board of Anglo-Irish Bank made effective use of this game theory some time ago, inducing its junior bondholders to accept substantial losses by offering them a deal to receive a portion of their investment or nothing at all. In the case of Greek debt, such a deal would create a credit event as it is bound with a punishment for recalcitrant bondholders. The alternative would be to establish some type of reward for those willing to rollover their holdings, a solution which wouldn’t necessarily trigger a default.
Before that happens, there will be a confidence vote in Greek parliament tomorrow for the approval of another €78bn in budget cuts. A failure to secure confidence would result in the ‘sudden death’ of the next payout from the first bailout agreement. The euro is nevertheless none for the worse, although it won’t attain stability unless it is able to mount the 1.4455 barrier. Weak support lies at 1.4010.
Market Bias Index
The euro is still perceived as undervalued against most of the other major currencies. Its ‘breakeven’ against the US dollar lies in the vicinity of 1.4390.
Deutsche Bank
Fixed Income Research – Global