This is a very good summary of what is going on (and yes, I’m biased because I’m quoted, but it is a good overall summary and describes the situation well).
BFW 03/01 12:39 No Payout on Greece $3.25 Billion Default Swaps, ISDA Says
BFW 03/01 11:16 ISDA Starts Meeting to Rule on Greek Credit Event
BN 03/01 12:39 *NO GREECE CREDIT EVENT ON ECB DEBT SWAP, ISDA SAYS :1004Z GA
BN 03/01 12:39 *NO PAYOUT ON GREECE $3.25 BILLION DEFAULT SWAPS, ISDA SAYS
BN 03/01 11:15 *ISDA STARTS MEETING TO RULE ON GREEK CREDIT EVENT :1004Z GA
Greece Debt Insurance Doesn’t Have to Pay Out, ISDA Says (1)
2012-03-01 13:01:20.499 GMT
(Adds ISDA comment in third paragraph.)
By Abigail Moses
March 1 (Bloomberg) — Default insurance on Greek debt
won’t be paid out, the International Swaps & Derivatives
Association said after it was asked to rule whether part of the
nation’s $170 billion bailout was a credit event.
The group said the European Central Bank’s exchange of
Greek bonds for new securities exempt from losses being imposed
on private investors hasn’t triggered $3.25 billion of
outstanding credit-default swaps. ISDA’s determinations
committee, including JPMorgan Chase & Co. and Pacific Investment
Management Co., said the switch didn’t constitute subordination,
one of the criteria for a payout under a restructuring event.
“The situation in the Hellenic Republic is still
evolving” and today’s decisions “do not affect the right or
ability to submit further questions,” ISDA said in a statement.
The decision is not an expression of the committee’s “view as
to whether a credit event could occur at a later date,” the
A swaps payout may still happen if Greece uses collective
action clauses on private investors who refuse to take so-called
haircuts on their debt holdings, according to ISDA’s rules.
Officials including former ECB President Jean-Claude Trichet
have opposed triggering swaps because they’re concerned traders
would be encouraged to bet against failing nations and worsen
Europe’s debt crisis.
“There’s value to getting some clarity even if the
ruling’s no,” said Peter Tchir, founder of New York-based hedge
fund TF Market Advisors. “It’s a pretty big issue for what
they’re trying to do in other countries.”
It costs $7.3 million in advance and $100,000 annually to
insure $10 million of Greek debt for five years, signaling a 95
percent probability of default within that time.
Political determination to avoid the stigma of a credit
event has been waning as Greece struggles to meet the conditions
of its latest 130 billion-euro ($170 billion) bailout. Standard
& Poor’s downgraded the nation to “selective default” on Feb.
27 because of the government’s decision to retroactively insert
CACs into bond terms.
While Greece is negotiating the biggest ever debt
restructuring, the volume of credit-default swaps on the line
has tumbled. The net amount of debt protected is no more than
for some companies and represents less than one percent of the
nation’s bonds and loans outstanding.
Credit-default swaps on Greece now cover $3.25 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
Despite concerns at that time about a daisy chain of losses
if counterparties failed to meet their commitments, the Lehman
settlement and those of swaps guaranteeing debt of Fannie Mae
and Freddie Mac were “orderly” and caused no major disruptions
for the market, according to regulators.
A settlement on Greek swaps may bolster confidence in the
$258 billion sovereign insurance market and also help boost the
government bond market, Tchir said. Efforts to circumvent a
trigger risk undermining credit markets.
“The relevance of sovereign CDS has been called into
question, but they still have value,” said Georg Grodzki, head
of credit research at Legal & General Plc in London.
Insurance payouts may still happen if Greece uses the
collective action clauses its parliament introduced or if it
fails to make a payment in future. If an event is declared,
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.
Failure to Pay
Swaps on western European governments can pay out on a
credit event triggered by failure to pay, restructuring or a
moratorium on payments. Restructuring events are the most
subjective and have been removed as a trigger event for U.S.
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 that decides whether to
trigger swaps consists of representatives from 15 dealers and
investors. The group, which also includes Deutsche Bank AG and
the world’s biggest money manager BlackRock Inc., rules whether
a credit event should be declared after a request is made by a
market participant. The question on Greece was posed
‘Pain to Come’
“Technically the issue of the ECB subordinating other
investors hasn’t yet inflicted pain — just the threat of pain
to come,” said Bill Blain, a strategist at Newedge Group in
A request on Irish swaps was rejected last year when ISDA’s
determinations committee ruled the International Monetary Fund’s
preferential creditor status in that nation’s rescue didn’t
“Restructuring almost always causes confusion,” Tchir
said. “The fact that it is a restructuring does leave it lot
more subjective than it would be otherwise.”
For Related News and Information:
News on credit derivatives: NI CDRV <GO>
Top bond stories: TOPH <GO>
Credit-Default Swaps Sector Graphs: GCDS <GO>
World Credit-Default Swaps Pricing: WCDS <GO>
Biggest Credit-Default Swaps Movers: CMOV <GO>
–Editors: Michael Shanahan, Paul Armstrong
To contact the reporter on this story:
Abigail Moses in London at +44-20-7673-2118 or
To contact the editor responsible for this story:
Paul Armstrong at +44-20-7330-7185 or