Greek debt restructuring triggers credit default swap payouts

The International Swaps & Derivatives Association decided this afternoon that Greece’s debt restructuring deal is a credit event – a technical default – which triggers insurance payouts of up to $3.2 billion.

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ISDA’s determinations committee ruled that Greece’s use of collective action clauses (CACs) to force losses on government bondholders who refused to participate in a bond swap designed to put the country back on the road to recovery is a restructuring credit event, Bloomberg News reported.

Greece said today 85.8 percent of private creditors had accepted its bond swap offer, allowing the country to invoke CACs in its bond contracts and boost participation in the debt exchange to an estimated 95.7 percent, Reuters reported. The debt restructuring deal was needed to secure a second $170 billion bailout from the International Monetary Fund and EU.

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According to Bloomberg News:

Policy makers including former European Central Bank President Jean-Claude Trichet opposed payouts on Greek credit default swaps on concern traders would be encouraged to bet against failing nations and worsen the region’s debt crisis.

Alessandro Giansanti, a senior rates strategist at ING Groep NV in Amsterdam, told Bloomberg News ISDA's decision will “restore confidence” in the CDS market. “It’s important to keep investor confidence in this instrument as it will affect the ability of sovereigns to issue bonds,” he said. “If you want to attract investor demand, you have to offer them an instrument that will allow them to hedge exposure, and CDS is the best instrument for that.”

The actual amount of the credit default swap payments is likely to be less than $3.2 billion because bondholders are not losing all of their original investment, Reuters reported. An auction to determine the actual payout amount will take place on Mar. 19.

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