Euro Still Vulnerable to Greek Debt Drama

Wall Street Journal

NEW YORK—Greece’s efforts to reduce its crushing debt load will take center stage this week, with still-cautious investors likely to sell the euro if negotiations falter. Ahead of a coming March 20 bond-redemption deadline, Athens must persuade at least 90% of its private bondholders by Friday to participate in a voluntary debt exchange. As part of a recent €130 billion ($172 billion) assistance package, investors are being asked to accept a 53.5% write-down on their holdings, which will help keep the Hellenic republic from spiraling into a destabilizing default.

Market participants have become increasingly pessimistic about a deal, dubbed PSI for private-sector involvement, going off smoothly. Those fears helped shave nearly three cents from the euro’s value last week alone. After hitting a near-three-month high at $1.3486, the euro traded at $1.3200 late Friday.

« People want to push euro/dollar lower and want to position themselves for a partial failure of the PSI, » said Sebastien Galy, senior currency strategist at Société Générale in New York. With renewed pressure on euro-zone peripheral economies, « the odds are that we hit $1.30 within the next few weeks, » he added.

The worry is that, after months of uncertainty, Europe’s unfinished business could suck the euro into a downdraft, analysts say.

Auctions in Germany, Netherlands and Austria, which are scheduled to come to the market this week with an estimated €9 billion to €10 billion in government debt, could be important tests of investor sentiment.

Should Athens fail to strike a deal with its bondholders, it could rattle other bond markets that have only recently begun to settle.

In addition, euro-zone officials will meet this week to render a final verdict on Greece’s second bailout, with any delays likely to pressure the single currency.

On Friday, Greece’s five-year credit-default swaps hit a record high, indicating investors may be bracing for a messy default.

Although the International Swaps and Derivatives Association decided Thursday that Greece’s restructuring hadn’t triggered a payout of its CDS contracts, a poorly received debt exchange would change the game.

Analysts at Barclays Capital warned a participation rate below 75% would trigger more market turbulence.

« Although this is a low-probability event in our view, it will have a high impact, » the bank said. « Deciding on a new plan within days, which will be forced to all Greek debt holders and will most likely include a larger haircut, may prove to be a very difficult task. »

Aside from Europe, next week’s U.S. payrolls report may confirm what most economists say is a growing economic divergence between the euro zone and the world’s largest economy.

Strong U.S. data normally help feed appetite for higher-yielding currencies and put pressure on the dollar.

However, a jobs figure above the current consensus forecast of 210,000 may boost the dollar if it reduces the likelihood of the Federal Reserve unleashing a third wave of bond buying, or quantitative easing, to boost the economy.

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