WSJ: Euro Breakup Trades Take Hold In Bond Markets
-- International law Greek government bonds trade at premium to those based on Greek law
-- Deutsche Bank says this reflects markets' belief in Greek euro exit
-- Premium paid has shot up since September
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By Jessica Mead
Of DOW JONES NEWSWIRES
LONDON (Dow Jones)--A two-tier Greek government bond market is emerging as investors start to price in the chances of the country exiting the euro zone, currency strategists at Deutsche Bank AG warned Friday.
The world's biggest currency-dealing bank itself says it doesn't believe that Greece will exit the euro zone, but Deutsche Bank notes that Greek government bonds issued under English law are now trading at a higher price than those issued under Greek law, a shift which reflects the markets' belief in the country exiting the currency union.
While the English law sovereign bonds have commanded a premium over Greek law bonds for much of 2011, the additional price paid by investors for them has shot up since September.
"In the event of a Greek exit, it would be more straightforward for the Greek government to redenominate bonds issued under local law than it would under international law," said the bank's chief currency strategist Bilal Hafeez in a note to clients.
In the first major study into dealing with euro breakup risks, Japanese bank Nomura warned at the end of last month that investors should check whether the euro-zone bonds or other instruments they currently hold are based on English law, or local law.
Greek government debt issued under foreign law would be more likely to remain in euros, assuming a smaller euro still existed at all, the bank said, with courts likely left to decide the next steps.
But Nomura estimates suggests foreign-law debt accounts for only about EUR16 billion out of a total of EUR300 billion. The 94% of its debt that is governed by Greek law would probably be converted from euros into a new local currency in the event of a Greek exit.
