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Greece likely to avoid CDS trigger despite risks-ISDA
Reuters - 20/09/2011 18:55:10
By William James
LONDON, Sept 20 (Reuters) -
A restructuring of Greek debt should not trigger a payout on CDS contracts in the near term, nor should Athens' inability to pay state workers next month, says an official of the body that would decide whether a 'credit event' had occurred.
"CDS looks at obligations defined effectively as debt obligations -- bonds and loans," David Geen, General Counsel at the International Swaps and Derivatives Association (ISDA), said on Tuesday in an interview for Reuters Insider television.
"If their bonds and their loans are still current, even if they stop paying salaries for teachers and policemen, that is obviously a very unfortunate situation, but it doesn't trigger CDS."
The ISDA's determination committee would have the final say on whether a credit default swap triggering 'credit event' had occurred.
Greece's ability to pay state salaries and pensions next month hangs in the balance. It says it will run out of cash if it fails to convince international lenders it will implement necessary austerity measures to secure the next payment of its bailout funding .
The price of default insurance contracts suggests investors see the probability of a Greek default at more than 90 percent, according to Reuters calculations on data provided by Markit.
Greece has no bond repayments to make until December but faces some small interest bills over the coming months.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
For a link to the full Reuters Insider interview click
here: Reuters Insider
For more on how ISDA decides if a credit event has happened
see: (news)
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
Current proposals to restructure Greece's debt by asking investors to swap bonds for longer-dated obligations involving a loss of value were also unlikely to trigger payment on the $4.17 billion of net outstanding CDS contracts.
Any restructuring must be binding on all bondholders to meet the definitions laid out by ISDA .
"If it's voluntary, even if there's some arm-twisting in the background, typically that wouldn't reach the level of binding all holders," Geen said, stressing that the final decision lies with the committee.
Latest estimates vary over the level of participation in the bond swap, though a Reuters poll last week showed economists predict a 70 to 80 percent take-up -- below the 90 percent Greece has said it would want for the swap to go ahead.
The deteriorating credit standing of peripheral euro zone government bonds -- with Italy the latest to have its credit rating cut, on Monday -- could push up the already-high level of cash being used as collateral to back CDS contracts, Geen said.
"Cash is overwhelmingly used anyway ... You might start seeing that increase but as long as the bonds are not seen as close to default they will continue to post them. They'll just have to post more of them," Geen said.
A 2011 ISDA survey showed cash accounted for 80 percent of collateral received, with only 10 percent in government securities.
LONDON, Sept 20 (Reuters) -
A restructuring of Greek debt should not trigger a payout on CDS contracts in the near term, nor should Athens' inability to pay state workers next month, says an official of the body that would decide whether a 'credit event' had occurred.
"CDS looks at obligations defined effectively as debt obligations -- bonds and loans," David Geen, General Counsel at the International Swaps and Derivatives Association (ISDA), said on Tuesday in an interview for Reuters Insider television.
"If their bonds and their loans are still current, even if they stop paying salaries for teachers and policemen, that is obviously a very unfortunate situation, but it doesn't trigger CDS."
The ISDA's determination committee would have the final say on whether a credit default swap triggering 'credit event' had occurred.
Greece's ability to pay state salaries and pensions next month hangs in the balance. It says it will run out of cash if it fails to convince international lenders it will implement necessary austerity measures to secure the next payment of its bailout funding .
The price of default insurance contracts suggests investors see the probability of a Greek default at more than 90 percent, according to Reuters calculations on data provided by Markit.
Greece has no bond repayments to make until December but faces some small interest bills over the coming months.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
For a link to the full Reuters Insider interview click
here: Reuters Insider
For more on how ISDA decides if a credit event has happened
see: (news)
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
Current proposals to restructure Greece's debt by asking investors to swap bonds for longer-dated obligations involving a loss of value were also unlikely to trigger payment on the $4.17 billion of net outstanding CDS contracts.
Any restructuring must be binding on all bondholders to meet the definitions laid out by ISDA .
"If it's voluntary, even if there's some arm-twisting in the background, typically that wouldn't reach the level of binding all holders," Geen said, stressing that the final decision lies with the committee.
Latest estimates vary over the level of participation in the bond swap, though a Reuters poll last week showed economists predict a 70 to 80 percent take-up -- below the 90 percent Greece has said it would want for the swap to go ahead.
The deteriorating credit standing of peripheral euro zone government bonds -- with Italy the latest to have its credit rating cut, on Monday -- could push up the already-high level of cash being used as collateral to back CDS contracts, Geen said.
"Cash is overwhelmingly used anyway ... You might start seeing that increase but as long as the bonds are not seen as close to default they will continue to post them. They'll just have to post more of them," Geen said.
A 2011 ISDA survey showed cash accounted for 80 percent of collateral received, with only 10 percent in government securities.
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