There is ton of uncertainty surrounding a scenario where Greece or another country leaves the euro. One uncertainty is whether or not a country would continue to pay down its debt, and whether it would repay it in euros.According to a report in the FT, derivatives traders at major investment banks across Wall Street are having the same conversation with counterparties. They want to make sure that their euro-denominated transactions continue to get paid in euros as well.
The discussions are occurring partly against the backdrop that, according to the FT, “no bank has dramatically adjusted its exposure to the five [peripheral] countries, betting that gross positions, which range from $5.4bn at Morgan Stanley to more than $20bn at JPMorgan Chase, are manageable.”
One source expressed uncertainty to the FT:
One senior Wall Street executive said his bank was approaching derivatives counterparties to say: “‘We’ve got this contract, it’s in euros, what I want to know is in the event that Spain were to be redenominated are we going to end up being adversaries on this or can we just agree that this is a euro contact? Let’s just move it to London law so we each agree that we know where we stand.’
Another said it’s altering the nature of new transactions, which could be part of the reason why peripheral bonds have been underperforming:
A trader heading a eurozone crisis unit at another US bank said counterparties were being told to use collateral that could not suddenly switch from the euro to a new currency.
“You can make sure you post collateral that has less redenomination risk,” he said.
Read more at FT.com.