JPMorgan Has Euro-Exit Plans

JPMorgan Chase & Co. has set up a contingency plan allowing it to resume trading the bonds of any nation exiting the euro area to avoid disruption to its clients.

The largest U.S. bank by assets said while a break-up of the 17-nation currency zone was not its central view, the possibility has convinced it to establish procedures to limit any disruption to its bond-trading activities. The implied probability of a country leaving the monetary union is 53 percent for next year, and 63 percent by the end of 2014, based on bets at Intrade.com. Spain hasn't ruled out quitting the euro, El Confidencial reported this week.

“We've been doing some contingency work to ensure that we have a robust system and ability to absorb shocks if on a Sunday night a sovereign decides to leave the euro,” Carl Norrey, head of European rates securities at JPMorgan in London, said in interview on July 23. “The probability of a country exiting the euro is no longer zero.”

Financial turmoil in the euro area deepened this week as the Spanish region of Valencia said it will need aid from the central government, and Moody's Investors Service put a negative outlook on the Aaa ratings of Germany and the Netherlands, saying they may need to bail out other member nations.

Spanish and Italian bonds slumped this week, adding to speculation the nations will need financial assistance. Spain's 10-year yields surged to a euro-era record of 7.751 percent today, while the rate on its two-year notes breached 7 percent for the first time. Greece, Ireland and Portugal sought external help after their borrowing costs rose above that level. Italian 10-year yields rose to 6.71 percent, the highest since Jan. 16.

A survey published by JPMorgan on July 17 showed that 29 percent of the 145 clients who responded believed that Greece would leave the euro this year, and as much as 5 percent predicted a core country would exit the single currency in 2013.

German Vice Chancellor Philipp Roesler told broadcaster ARD on July 22 he was “very skeptical” Greece could be rescued. The Spanish government hasn't ruled out leaving the euro as it considers options including an international bailout, the El Confidencial newspaper reported, citing people close to Prime Minister Mariano Rajoy.

“If one of the euro countries leave, we would be able to segregate all the securities, have them in different books, format new international securities identification numbers, and be ready to trade with clients in as short a period of time as possible,” Norrey said. “It's a massive task. You don't want to be starting that process from scratch on Monday morning.”

Primary Dealer

JPMorgan has no plans to withdraw from any nation in the euro area where it is a market maker even as the debt crisis makes it become more “expensive” to be a primary dealer, Norrey said. JPMorgan trades directly with every sovereign issuer in the euro area.

“No one can say it's easy to be a primary dealer at the moment,” he said. “Auctions have become expensive in an environment of low flow but high volatility. But as a major bank and a provider of liquidity, we need to be there to assist our clients.”

Primary dealers are companies obliged to bid at government bond sales to ensure there is enough demand to keep borrowing costs low. They have to purchase a certain amount of the debt issued each year and to take the risk they may be unable to sell the securities afterward.

In return, primary dealers benefit because, in most cases, investors buy the securities on offer. Central banks and some pension funds will only do business with such financial institutions.

“Being a primary dealer gives you unparalleled insight into the challenges that clients face at the point of issuance right through to deal performance in secondary-market trading,” Norrey said. “It gives you a stronger case to be at the table again and again.”

Bloomberg News

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