Holders of credit-default swaps on Greek bonds shouldn't tear uptheir contracts after yesterday's ruling against a payout. TheInternational Swaps & Derivatives Association said the swapshadn't been triggered by the European Central Bank's exchange ofGreek bonds for new securities exempt from losses taken by privateinvestors. The group will now probably be asked to determinewhether collective action clauses, or CACS, being used by Greece toimpel investors to participate in a wider exchange of bonds thatwould trigger the swaps.

“They will have to enforce CACS,” said Alessandro Giansanti, asenior rates strategist at ING Groep NV in Amsterdam. “At thatpoint the exchange will become coercive and that will be arestructuring event for CDS.”

The 130 billion-euro ($170 billion) bailout for Greece istesting the sanctity of the market for credit-default swaps andtheir effectiveness as a hedge against losses on government bonds.Policy makers including former ECB President Jean-Claude Trichethave opposed paying the contracts because they're concerned thattraders will be encouraged to bet against failing nations andworsen Europe's debt crisis.

Contracts tied to the debt of Greece signal a 95 percentprobability of default.

Such thinking is misdirected, according to Nicholas Spiro,managing director of Spiro Sovereign Strategy in London. Asettlement on Greek swaps may bolster confidence in the $258billion sovereign insurance market and help boost the governmentbond market, he said. Efforts to circumvent a trigger riskundermining credit markets, Spiro said.

“The sovereign CDS market is crying out for an injection ofconfidence because we are by no means out of the woods,” Spirosaid. “It's very important, particularly in much larger bondmarkets like Italy and Spain, that investors' hedges are perceivedto be credible.”

European leaders agreed to provide capital faster for theplanned permanent bailout fund in a concession to internationalpressure to strengthen the bloc's defenses against the debt crisis.Euro governments might pay the first two annual installments intothe 500 billion-euro fund this year and complete the capitalizationin 2015, a year ahead of schedule. A decision will come latertoday.

'One Final Vote'

The ECB's exchange of Greek bonds didn't constitutesubordination of private investors, one of the criteria for apayout under a restructuring event, ISDA said. The group'sdeterminations committee wouldn't rule out a credit event “at alater date,” according to the statement.

“We expect the next few days, perhaps next few weeks, toultimately send the ISDA committee back for one final vote,”Pacific Investment Management Co.'s Bill Gross said yesterday in aBloomberg television interview on “Surveillance Midday” with TomKeene.

Pimco is part of the ISDA determinations group along with banksand investors including JPMorgan, Barclays Plc, BlueMountainCapital Management LLC and D.E. Shaw & Co., according to ISDA'swebsite.

Greece has committed to reducing national debt to 120 percent ofgross domestic product by 2020, from 160 percent last year. Anegotiated debt swap, known as private-sector involvement, or PSI,will slice 100 billion euros off more than 200 billion euros ofprivately held debt if all investors participate.

The government said Feb. 24 it's seeking a 90 percentparticipation rate and set a 75 percent rate as a threshold forproceeding with the transaction. Investors are paying $7.3 millionin advance and $100,000 annually to insure $10 million of Greekdebt for five years. Greek 10-year bonds fell to a record 19.14cents on the euro after yesterday's ruling.

The recovery in an auction may be between 20 cents and 25 cents,Morgan Stanley analysts led by Paolo Batori wrote in a Feb. 27note.

Private investors have until March 8 to tender their bonds, andthe exchange for a majority of securities will be settled on March12. Greece has said it may activate collective action clauses tobind holdouts.

Funding for Portugal

“ISDA clearly has indicated that that would be a CDS trigger,”said David Nowakowski, credit strategist at Roubini GlobalEconomics LLC in London. “If they're not triggered, it's not theend of the CDS market. In corporates there are lots and lots ofexchanges, sometimes distressed exchanges, that don't triggerCDS.”

While Greece's debt restructuring is the biggest ever, thevolume of credit-default swaps on the line has tumbled. The netamount of debt protected is no more than for some companies andrepresents less than one percent of the nation's bonds and loansoutstanding.

Swaps on Greece (CDNNGRCE) now cover $3.25 billion of debt, downfrom about $6 billion last year, according to the Depository Trust& Clearing Corp. That compares with a swaps settlement of $5.2billion on Lehman Brothers Holdings Inc. in 2008.

Greece's debt restructuring, which triggered a downgrade toselective default by S&P this week, may make it harder forother indebted euro nations such as Portugal to fund themselves,said Moritz Kraemer, head of sovereign ratings at S&P inLondon.

“It ceased to be about Greece a long time ago,” Spiro said.“It's all about making sure this tale of woe does not repeat itselfelsewhere in the periphery. A payout is very likely. This is reallyabout the timing.”

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