(BN) Greece Debt Insurance Doesn’t Have to Pay Out, ISDA Says

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).

 

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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

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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

association said.

     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.

 

                          ‘Big Issue’

     “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

2008.

 

                      Counterparty Concern

 

     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.

companies.

     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

anonymously.

 

                         ‘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

London.

     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

constitute subordination.

     “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

Amoses5@bloomberg.net

 

To contact the editor responsible for this story:

Paul Armstrong at +44-20-7330-7185 or

Parmstrong10@bloomberg.net