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Finland demands collateral from Greece in return for participation in the bailout. This not only raises the tensions within the euro zone, but may also trigger a default and a credit event. Meet the “negative pledge” clause.

The upcoming bond swap isn’t expected to trigger a credit event, as it is “voluntary”. But collateral is totally different. The Finns aren’t letting go, and they put forward detailed programs.

They suggest that a  Luxembourg agency will hold Greek assets and will hold them as collateral, and if Greece defaults, the assets will be passed to the creditors (Finland). But here is where trouble begins:

The negative pledge clause means that Greece must secure its bonds in an equal manner. If Finland gets  privileged collateral while any other bondholders don’t get the same conditions, the terms are broken. This is External  Indebtedness which is strictly described in the bonds.

This could result in lawsuits from other bondholders, and now, Joseph Cotterill at FT Alphaville reports about the Finnish acknowledgement of this problem, and explains the meaning of it (emphasis mine)

…if there is no bondholder waiver, and if Greece does not secure the foreign-law bonds on the same basis, Greece will default on these bonds. It would be the first sovereign default in modern Western Europe. Possibly a credit event too…

Cotterill and his colleagues follow this story closely and very nicely if you’re interested in more details.

This Finnish complication is one of the reasons for the drop in EUR/USD, which dropped to 1.44 in a sharp move. Support under 1.44 is at 1.4330, followed by 1.4282. Resistance is at 1.4480, seen just a few hours ago.

For more on EUR/USD, see the euro dollar forecast.

Greek CDS is higher today, meaning a higher chance of default. This happens as other countries’ CDS is down.