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

The largest U.S. bank by assets said while a break-up of the17-nation currency zone was not its central view, the possibilityhas convinced it to establish procedures to limit any disruption toits bond-trading activities. The implied probability of a countryleaving the monetary union is 53 percent for next year, and 63percent by the end of 2014, based on bets at Intrade.com. Spainhasn't ruled out quitting the euro, El Confidencial reported thisweek.

“We've been doing some contingency work to ensure that we have arobust system and ability to absorb shocks if on a Sunday night asovereign decides to leave the euro,” Carl Norrey, head of Europeanrates securities at JPMorgan in London, said in interview on July23. “The probability of a country exiting the euro is no longerzero.”

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

Spanish and Italian bonds slumped this week, adding tospeculation the nations will need financial assistance. Spain's10-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 thefirst time. Greece, Ireland and Portugal sought external help aftertheir borrowing costs rose above that level. Italian 10-year yieldsrose to 6.71 percent, the highest since Jan. 16.

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

German Vice Chancellor Philipp Roesler told broadcaster ARD onJuly 22 he was “very skeptical” Greece could be rescued. TheSpanish government hasn't ruled out leaving the euro as itconsiders options including an international bailout, the ElConfidencial newspaper reported, citing people close to PrimeMinister Mariano Rajoy.

“If one of the euro countries leave, we would be able tosegregate all the securities, have them in different books, formatnew international securities identification numbers, and be readyto 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 startingthat process from scratch on Monday morning.”

Primary Dealer

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

“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 lowflow but high volatility. But as a major bank and a provider ofliquidity, we need to be there to assist our clients.”

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

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

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

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