Bloomberg News

ISDA Says Greek Aid Package ‘Shouldn’t Trigger’ Debt Swaps

July 22, 2011

(Adds Moody’s comment in seventh paragraph.)

July 22 (Bloomberg) -- The International Swaps & Derivatives Association said participation of private bondholders in the Greek rescue plan “should not trigger credit-default swaps” on the nation because it’s “expressly voluntary.”

Banks pledged to participate in a bond exchange and debt buyback program as part of a rescue plan for Greece, which will give the country 159 billion euros ($229 billion) of new aid. Ratings companies have signaled such a plan may result in Greece being given a default rating, with Fitch Ratings saying today that the nation faces a “restricted default” tag.

That still doesn’t satisfy ISDA’s rules for triggering payouts on Greek debt insurance contracts. Politicians grappling with the euro-region sovereign crisis had until yesterday opposed any move that would be termed a default because of the word’s stigma and concern it would spread contagion.

“Since this is expressly voluntary, it should not trigger CDS,” David Geen, ISDA’s general counsel in London, said in an e-mail. “Also, since it is, at this stage, simply a proposal, there is nothing yet to raise to the determinations committee -- though that may not stop someone trying.”

Binding Decisions

ISDA’s determinations committee makes binding decisions for the market on whether credit swaps can be triggered. A credit event can be caused by a reduction in principal or interest, postponement or deferral of payments or a change in the ranking or currency of obligations, according to the New York-based trade group’s rules.

Any of these changes must result from a deterioration in creditworthiness, apply to multiple investors and be binding on all holders.

Moody’s Investors Service said in a statement today that it’s “analysing the measures announced by policy makers in Brussels and will issue a public comment on any credit implications in due course.”

Credit-default swaps on Greece plunged 430 basis points to a six-week low of 1,570 as of 3:30 p.m. in London, after earlier dropping to 1,500, the biggest decline on record. That’s down from an all-time high of 2,568 basis points on July 18 and signals a 73 percent chance the government will default within five years, a figure that approached 90 percent earlier this month.

“The systemic risk coming from Europe has been removed for the time being,” said Sebastian Paris Horvitz, chief market strategist at HSBC Private Bank Suisse SA in Geneva. “Europeans need now to deliver.”

The participation of banks, insurers and other private investors -- insisted upon by German Chancellor Angela Merkel -- will contribute 135 billion euros of financing for Greece through 2020, the Institute of International Finance said in a statement yesterday.

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.

--With assistance from Esteban Duarte in Madrid. Editors: Paul Armstrong, Cecile Gutscher

To contact the reporter on this story: Abigail Moses in London at

To contact the editor responsible for this story: Paul Armstrong at

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