Bloomberg News

Greek Default to Hurt the Unhedged Most, Sheets Says: Tom Keene

June 17, 2011

June 17 (Bloomberg) -- The biggest impact on the financial system from a default on Greek government debt would be on investors who didn’t seek credit protection, according to Morgan Stanley’s Andrew Sheets.

Credit-default swaps on Greece cover a net notional $5 billion, according to the Depository Trust & Clearing Corp., which runs a central registry that captures most trades. That’s just 1 percent of the Greek government’s $482 billion of bonds and loans outstanding, according to data compiled by Bloomberg. Swaps pay buyers face value for the underlying securities or the cash equivalent if a borrower fails to adhere to its agreements.

“Most of the market is not hedged,” Sheets, head of European credit strategy at Morgan Stanley in London, said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “That obviously creates a segment of the market that has a vested interest in delaying or avoiding a hard restructuring in the near term.”

Credit-default swaps on Greece rose to a record 2,237 basis points yesterday before slipping today to 1,933 basis points. A basis point on a credit-default swap protecting 10 million euros ($14.3 million) of debt from default for five years is equivalent to 1,000 euros a year.

“I don’t think the primary risk comes through the credit- default swaps; we think it comes through those other connections between a country and the broader system,” Sheets said.

About one-third of Greece’s debt is held domestically, of which half is held by the nation’s banks, while two-thirds is held by international investors, Sheets said.

An agreement that would require all bondholders to participate in a Greek rescue would have a bigger impact on financial markets and would be more likely to trigger swap contracts, Sheets said.

“If it’s voluntary, I think markets would be more comfortable with it,” which would reduce the likelihood that guarantors would be forced to pay on the swaps, he said.

--With assistance from Ken Prewitt in New York. Editors: Greg Storey, Paul Cox

To contact the reporters on this story: Daniel Kruger in New York at; Tom Keene in New York at

To contact the editor responsible for this story: Dave Liedtka at

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