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The Greek "Credit Event" and What it Means for the Euro

by Andrei Knight, Senior Portfolio Manager,
There’s talk this morning of a Greek “credit event”, according to the ISDA. So what does that mean?
Well, first the good news – most likely Greece will get the 130 Billion Euros it needs. The IMF board is also voting on March 15th regarding a 4-year loan program for Greece for an additional 28 Billion Euros.
The problem is that by invoking a CAC (collective action clause), Greece is essentially forcing creditors to take a cut on the amount owed to them, in some instances by as much as 70%. This causes the triggering of credit default swaps, and the ISDA has scheduled an auction for March 19th to cover the nearly 3.2 Billion Euros in payouts outstanding so far.
Essentially, by declaring a “credit event” (the market and media friendly way of saying “default”), the ISDA is protecting the CDS market from further claims from creditors effected by the CAC.
What does all this mean for the Euro?
It depends on whether the markets put more emphasis on Greece receiving the bailout it needs, or on the fact that it had to default on the majority of its obligations in order to qualify for it.
As of now, we’re watching a key price level at 1.3117 on the EUR/USD – this is the critical “neck” line of a Head and Shoulders pattern on the Daily chart. If we close below this level today, very likely a prolonged down move will follow, taking us to 1.2855; if, on the other hand, 1.3117 can hold as support, we can expect this pair to continue chopping in the 1.3095 – 1.3290 range in the days ahead.
Across the Atlantic, the Fed will be releasing the latest Budget Balance figures for the US at 18:00 GMT, widely expected to widen from -27.4 Billion Dollars to -229.2 Billion. Here again, much will depend upon the market’s perception – a widening deficit can potentially be viewed as negative for the long-term economic outlook, but at the same time as creating greater demand for the currency. Once again, whether we close above or below 1.3117 when all the dust settles will be key.

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