Surprise, Surprise, surprise: youtube.com
Greek Deal Won't Trigger CDS Payouts, Panel Says
LONDON—Payouts on credit-default swaps covering Greek sovereign debt will not be triggered after the country last week passed legislation allowing it to strong-arm private creditors into accepting losses on their holdings, a committee of dealers and investors decided Thursday.
The committee noted, however, that the situation with Greece is "still evolving" and that even though it has ruled Greek CDS will not be triggered at this time, there is nothing stopping the same committee from forcing payouts from sellers of Greek CDS at a later date.
The International Swaps and Derivatives Association's so-called Determinations Committee for Europe voted on two potential credit-event questions posed by anonymous market participants this week. To address whether it should trigger Greek CDS in future, a third submission would have to be sent to the committee for its review.
The 15-member committee, made up of dealers and investment firms, voted unanimously that a credit event has not occurred in relation to two questions submitted by market participants on Monday and Wednesday.
The first question, submitted late Monday, and accepted for consideration Tuesday, was based on the argument that so-called collective-action clauses retroactively inserted into Greek-law bonds had constituted a "credit event." This could force losses on private sector creditors when the European Central Bank will not suffer losses, effectively putting the ECB above private investors in priority-of-payments ranking.
The second question asked whether the debt exchange resulting in "a reduction in the amount of principal or premium payable at maturity or at scheduled redemption dates" between Greece and a sufficient number of private bondholders to bind all holders, would result in a "restructuring credit event."
In mid-January, ISDA said that the inclusion of collective-action clauses in Greek-law bonds "would not, in and of itself, be expected to trigger a credit event." But it added that "the use of such a clause to effect a reduction in coupon or principal" could be enough to trigger CDS because it would force the restructuring on all bondholders.
CDS, which function like a form of default insurance for corporate and sovereign bonds, can be triggered by a restructuring of the reference entity's debt, a failure to pay interest or principal on the bonds, or a bankruptcy, among other things.
There are a net $3.2 billion worth of Greek sovereign debt CDS outstanding, according to the Depository Trust and Clearing Corp.
Last week, private holders of Greek government debt accepted a restructuring involving the write-down of 53.5% of their investment, alongside a €130 billion ($173.2 billion) bailout agreement between the Greek government and its official lenders, the European Union and the International Monetary Fund.
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