March 1, 2012

CDS Not Triggered by Greek Bailout: ISDA

Switch of bonds did not constitute credit event, says association

The bailout of Greece involving an exchange of sovereign bonds did not constitute a credit event and therefore need not trigger credit default swaps to pay creditors, according to the International Swaps & Derivatives Association.

Bloomberg reported Thursday that the ISDA, asked to rule on whether a credit event had taken place that would trigger insurance payouts on bonds, said that the European Central Bank’s exchange of Greek bonds for new securities exempt from losses being imposed on private investors did not constitute subordination, which is a requirement for a payout under a restructuring event.

In a statement, ISDA said in part, “The situation in the Hellenic Republic is still evolving” and the decisions it rendered Thursday “do not affect the right or ability to submit further questions.” It added that its decision is not an expression of the committee’s “view as to whether a credit event could occur at a later date.”

CDS could still be triggered if Greece forces other bondholders to accept a haircut under collective action clauses, according to ISDA rules. Another possibility is that Greece may miss a payment; that too would trigger CDS, and in either of those eventualities an auction would likely be arranged to set a recovery value on the bonds. Insurers would then be on the hook for the difference between the bonds’ face value and whatever they brought at auction.

In 2011 a call for Irish swaps to be triggered after its bailout was also rejected, with a ruling by the ISDA determinations committee that the preferential creditor status, in that case of the International Monetary Fund, did not constitute subordination.

Currently the cost of insuring $10 million in Greek debt for a five-year period is $7.3 million in advance and $100,000 per year; that indicates a 95% chance of default within that period.

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