Greek Deal Triggers Default Swaps

ISDA says Greece's forcing investors to participate should trigger insurance payouts.

Greece’s use of collective action clauses forcing investors to take part in the sovereign restructuring should trigger $3 billion of insurance payouts under rules governing credit-default swap contracts.

The International Swaps & Derivatives Association’s determinations committee meets at 1 p.m. in London today to decide whether the use of CACs is a restructuring credit event which will cause a payout of swaps insuring Greek debt.

The Greek government said today it reached its target for participation in the restructuring, with investors in 95.7 percent of bonds taking part, after it received approval to activate CACs to force the hand of holdouts. Bondholders tendered 152 billion euros ($201 billion) or 85.8 percent, of bonds governed by Greek law after the government offered to swap their holdings for new securities, it said.

“After this morning’s announcement that CACs clauses will be invoked I think most people would be surprised if the answer was negative,” said Elisabeth Afseth, a fixed income analyst at Investec Bank Plc in London. “I’ve been surprised throughout at the strong desire not to trigger CDS. This should be good for anyone seeking protection elsewhere, such as Spain or Italy.”

ISDA said last week that swaps on Greek bonds hadn’t been triggered by the European Central Bank’s exchange of the bonds for new securities exempt from losses taken by private investors. Under ISDA rules the use of CACs should trigger a credit event.

Although policy makers had hoped to achieve debt sustainability in Europe’s most indebted nations without triggering default swaps, political determination to avoid the stigma of a credit event waned as Greece struggled to meet the terms of its bailout. Standard & Poor’s downgraded the nation to selective default on Feb. 27 after the government retroactively inserted CACs into bond terms.

Credit-default swaps on Greece now cover $3.16 billion of debt, down from about $6 billion last year, according to the Depository Trust & Clearing Corp. That compares with a swaps settlement of $5.2 billion on Lehman Brothers Holdings Inc. in 2008.

While there were concerns at that time about a daisy chain of losses if counterparties failed to meet their commitments, the settlement of swaps guaranteeing debt of Lehman, as well as Fannie Mae and Freddie Mac, were “orderly” and caused no major disruptions for the market, according to regulators.


Restructuring Event

Swaps on western European governments can pay out on a credit event triggered by failure to pay, restructuring or a moratorium on payments.  A restructuring event can be caused by a reduction in principal or interest, postponement or deferral of payments or a change in the ranking or currency of obligations, according to ISDA rules. Any of these changes must result from deterioration in creditworthiness, apply to multiple investors and be binding on all holders.

The determinations committee which decides whether a credit event has occurred consists of representatives from 15 dealers and investors. The group, which includes Deutsche Bank AG, Pacific Investment Management Co. and Morgan Stanley, rules after a request is made by a market participant.

In a restructuring credit event investors have the right to choose whether to settle their default swap contracts.

Should the committee rule a credit event has taken place auctions will be held to set a recovery value on the bonds and swaps sellers will pay buyers the difference between that and the face value of the debt.


Bloomberg News



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