Greek Debt Restructuring Stymied by Default Swap Concern, Citigroup Says
By Abigail Moses - May 19, 2011 1:56 PM GMT+0200
Greece is unlikely to restructure its debt in the short term because it would be difficult to do so without triggering payouts of credit-default swaps, according to Citigroup Inc.
“
It is certainly possible to envisage forms of restructuring which fail to trigger CDS, but we are doubtful that they will be employed in practice,” said Michael Hampden- Turner, a strategist at Citigroup in
London. “We suspect that European and ECB policy makers will duck the hard decisions.”
Political leaders and European Central Bank officials are likely to “muddle through” with another “state-funded bailout, perhaps this time collateralized by future asset sales,” he said. New steps are needed after last year’s 110 billion-euro ($156 billion) rescue failed to restore Greece’s financial health.
European officials are trying to avoid tripping swaps, with French Finance Minister
Christine Lagarde saying this week that
“anything that would constitute a credit event, is for me off the table.” Speculation is increasing that a restructuring of Greek bonds may be possible without meeting the International Swaps & Derivatives Association’s definitions of such an event.
That could be avoided if changes are voluntary rather than binding,Hampden-Turner said.
But even a voluntary restructuring, or “reprofiling” as officials are calling a possible maturity extension, might still trigger the contracts, he said.
Stigma, Contagion
Officials struggling to stem the crisis want to avoid triggering swaps out of concern for stigma, contagion and rewarding speculators, whom they blame for worsening the region’s crisis, Hampden-Turner said. Greek debt will likely have to be restructured at some point, he said.
It would be difficult to persuade investors to willingly accept changes without some sort of coercive “stick,” and options including taxes and retroactively applying collective action clauses could still trip swaps, Hampden-Turner said. Official pressure is unlikely because it would be “politically unpalatable” to force losses only on European financial institutions, while
hedge funds and proprietary trading desks outside the region escape such demands, he said.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
“We are less convinced by the argument that politicians are determined to see CDS holders punished and hedge funds lose,” Hampden-Turner said. “Politicians might like to avoid a scenario in which CDS trigger, but contagion seems like a more significant and legitimate concern.”
(Bloomberg)
