Greek credit-default swap causes concern over other EU bonds

Reuters / /John Kolesidis
Fears over the credibility of debt papers in major troubled economies have begun to mount after the International Swaps and Derivatives Association (ISDA) acknowledged a credit event for Greece.

The ISDA has said it will pay back the holders of insurance on Greek bonds, or Credit Default Swaps (CDS), with part of that money allocated to the government. Now experts wonder which other indebted economies will follow suit.

The deal "raises the question of which country is next and which banks are most exposed," Hank Calenti, a bank analyst at Societe Generale in London, wrote.

Portuguese bonds have already started to be ringing the alarming bells, with the yields having recently increased significantly, agrees Yaroslav Lissovolik, chief economist at Deutsche Bank, Russia, talking to Kommersant daily.

International rating agencies also took the move negatively, with Fitch Rating taking more points off its Greek rating. Now it is down from C – a pre – default rating – to RD, or restricted default, as the agency classified the agreed swap as “distressed debt exchange.” Since there was a forced element in the deal, Fitch took it as a form of sovereign default. Moody’s also said on March 10 Greece had effectively defaulted on its debt obligations, saying the agreement with private creditors was “a swap in the wake of distress.” S&P downgraded Greece to “selective default” in late February 2012.

However, previous experience of CDS repayments had almost no effects for the markets. The swap deals covering losses on the Lehman debt, as well as those of Fannie Mae and Freddie Mac, were "orderly" and caused no major disruptions for the market, regulators said.

And this time around the overall payouts will be significantly below the $3.2 billion. Chris Weafer, chief strategist of Troika Dialog, said that the payout will not have much effect because CDS market is a “multi-trillion business.”

So, “we do not foresee a significant impact from the Greek credit event on the financial markets. The amounts of exposure are relatively small,” said Robert Pickel, chief executive officer of ISDA.

The exact level of payouts will be determined on March 19.

ISDA – the private organization that rules on such cases – said its committee ruled that a “restructuring credit event” had occurred. The main trigger for the decision was the use of “collective action clauses”, which allows for the forcing of unwilling bond-holders, who bought under the Greek law, to swap. The clause means that around 96% of all Greek bonds belonging to the country’s private sector could be restructured.

The eurozone ministers on Friday already released up to €35.5 billion ($47 billion) in bailout money to fund the debt swap. Investors exchanging bonds will receive up to €30 billion, or 15% of the remaining money they are owed, as a sweetener for the deal and €5.5 billion for outstanding interest payments.