The euro fell Friday, weighed by a decision by the International Swaps and Derivatives Association, which declared that Greece's recently-completed debt exchange made investors eligible for payouts on insurance-like contracts designed to protect against losses on Greek sovereign debt. Early Friday, Greece announced that more than 85% of its private creditors had agreed to restructure about EUR200 billion worth of debt.
The move helped provide relief for the cash-strapped nation, and cleared the way for Athens to receive a EUR130 billion international aid package. Yet Greece's use of new legislation--called a "collective action clause"--which forced unwilling investors to take part in the debt swap, made ISDA's decision a foregone conclusion. In a closely-watched decision, a committee of 15 dealers and investment firm representatives decided that the Hellenic republic's effort to reduce its crushing debt burden constituted a "credit event" that would trigger credit-default swaps. And despite the reduction of Greece's debt, the country's deep economic contraction is likely to make it more difficult for Athens to reach deficit targets established by international lenders. Unemployment has surpassed 21%, and its total debt exceeds its gross domestic product by a wide margin. The level of investor participation in Greece's debt swap was irrelevant "because they were going to use the collective-action clause no matter what," said Aroop Chatterjee, chief foreign exchange quantitative strategist at Barclays Capital in New York. Calling Greece's growth prospects "ugly," Chatterjee added: "the question is whether Greece is in a better state after the debt swap?" Late Friday, the euro was at $1.3122 from $1.3274 late Thursday, according to EBS via CQG. The dollar was at Y82.44 from Y81.55, while the euro was at Y108.20 from Y108.26. The U.K. pound was at $1.5678 from $1.5822. The dollar was at CHF0.9186 from CHF0.9078. The ICE Dollar Index, which tracks the U.S. dollar against a basket of currencies, was at 79.969 from about 79.139. A surprisingly strong U.S. employment report, which showed the economy added 227,00 jobs, helped boost the dollar to its highest level against the yen since April 2011. While good economic figures normally lead investors to buy higher-yielding stocks and currencies, the data helped diminish expectations that the Federal Reserve will unleash a new wave of bond-buying to stimulate the economy. That normally weakens the greenback. Although Greece completed its controversial debt exchange, the Hellenic republic's bleak growth prospects are heightening speculation that the country could require a new bailout at some point in the future. Meanwhile, new concerns are battering Portugal and Spain. Meanwhile, analysts are still uncertain on how a Greek CDS payout might reverberate across markets. According to market watchers, there are a net $3.2 billion worth of CDS contracts on Greek sovereign bonds outstanding. Yet Mark Grant at Southwest Securities, citing Bank of International Settlements data, noted there are about $75 billion worth of Greek default insurance contracts. That could make the after-effects of a CDS payout far more pernicious. "This will give rise to all kinds of default clauses in all kinds of securitizations for Greece and then for the Greek banks who will also be declared in default soon," Grant said. "The fat lady has not yet begun to sing," he added.