9th March 2012
First and perhaps most important is the impact on the credit default swap market. There remains a significant question market over whether the Greek refinancing constitutes a credit event and would therefore trigger the ‘insurance' part of a credit default swap. ISDA is due to give the conclusion of its deliberations on whether Greece has technically defaulted today but Shaun Richards, says: "ISDA could defer its decision again. There are other grounds on which it could declare a default (it's possible that one of the bonds had a 100% acceptance rate) and indeed on logical grounds it should now declare a default but uncertainty remains. Once it has we will find out who has written the Credit Default Swaps on Greek bonds as they declare their losses on them."
"If a "credit event" is declared, ISDA will decide whether to hold an auction to determine the value of Greece's debt–and, thus, how much will be paid out on CDS."
The question has left the CDS market in turmoil – If no credit event is declared, it threatens to undermine the credibility of the CDS market. If investors cannot buy protection against a managed default (which, to date, the Greek crisis appears to be), then it invalidates much of the purpose of the CDS market.
This Wall Street Journal piece suggests that the application of force on the part of Greek policymakers may be the swing factor: "The decision to use force means conditions will have been met to trigger credit-default swaps."
The article also demonstrates that the implications are not significant outside the credit default swap market: "There are $3.2 billion worth of credit-default swap contracts outstanding, after subtracting offsetting contracts bought and sold by the same firm, according to figures from the Depository Trust & Clearing Corp. Mr. Venizelos called that "an amount that is completely insignificant for the Greek and European economy."
The other unresolved issue for Greek policymakers is dealing with the refusniks. They may only be 14.2% of the overall bondholders, but there are some trouble-makers in their midst. As this piece on Zerohedge points out, there is a band of bondholders who believe that they are entitled to par recovery in law and as such, are likely to sue the Greek government:
Their view is based on a loophole in certain state bonds: "A tiny €412.5 million bond issued by Hellenic Railways with a clause that "allows bondholders to argue that Greece is in default if it is trying to restructure or change the terms of its debt, the sources said. …. If Greece refuses to do so, this may trigger similar provisions on other Greek railway bonds, potentially landing Athens with a bill of about 3 billion euros, with investors demanding immediate repayment." Shaun Richards has brought this out in his blog here.
However, few fancy their chances. As Seeking Alpha points out here: "Greek bondholders are dealing with a borrower that is effectively broke. The refusal to participate in the swap is a calculated move. Whether it will ultimately result in a better outcome for those investors is a question I cannot answer. The holdout investors, many of which are reported to be hedge funds, may seek compensation through credit default swaps or they may turn to international courts."
Neither of these issues will scupper the Greek deal, but they do create complications. That said, a default of this magnitude was unlikely to proceed smoothly.
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