As expected, today the Ministry of Finance of the Hellenic Republic announced (press release here) an invitation to eligible holders of Greek bonds, to exchange them for six-month notes to be issues by the European Financial Stability Facility (EFSF), for up to the aggregate amount of 10 billion euros.
The current auction, if successful, is expected to lower Greek debt by about 10% of GDP. The IMF has set this informal haircut as a prerequisite, so that Greek Debt/GDP levels come down a bit, in order for the fund to continue to provide financing for Greece in the ongoing European debt saga.
Designates securities are listed below:
The question is, will institutional holders tender their bonds? The answer is yes for two reasons.
First, the prices offered are better than current market prices. Therefore it is better selling in this auction than selling to the market.
Second, most institutions holders of Greek debt are European banks that are either fully or partially state controlled. Therefore, the success of this auction is more an issue of politics than finance.
And the reason that this will be a positive catalyst for the euro - at least in the short term - is that the current price action of the euro has more to do with default risk probability than with trade balance data. Please read more about this in a older article of mine: Why Printing Euros Will Make The EURUSD Rise
As such I expect the euro to continue to rise for the time being, until such a time where we are once again reminded (either via Spain or Ireland), that the European debt saga is not over.