Bloomberg News

Greek Credit-Default Swap Payout Should Be Allowed, Tchir Says

October 17, 2011

Oct. 17 (Bloomberg) -- Greek sovereign credit-default swaps should be allowed to pay out to support demand for government bonds and ensure the wrong investors aren’t punished, according to hedge fund manager Peter Tchir.

Swaps, which pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to meet debt agreements, will lose value as a hedging tool if they don’t work as intended, Tchir, founder of TF Market Advisors in New York, wrote in a note. That will hurt investors who use swaps to manage risk as well as those who speculate, and force asset sales, he said.

The European Central Bank has insisted since the start of the crisis that there should be no credit event that triggers swaps. An involuntary restructuring could trip the contracts and policy makers are now struggling to persuade investors to accept bigger losses on Greek debt than the 21 percent already agreed.

“If they are really pushing for a true restructuring where banks and insurance companies are for all intents and purposes forced to accept a big haircut, they should want to trigger a CDS credit event,” Tchir wrote. “Lashing out by manipulating markets and rules will do more harm than good.”

A restructuring 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 International Swaps & Derivatives Association. Any of these changes must result from a deterioration in creditworthiness, apply to multiple investors and be binding on all holders. ISDA’s determinations committee rules whether credit swaps can be triggered.

“The smart, hedged banks will be the ones punished,” Tchir said. “The EU wants to punish the hedge funds, but all they will do is punish banks that have been most prudent.”

Contract Sanctity

Lawmakers have gone back and forth over the sanctity of bond contracts as the crisis escalated. German Chancellor Angela Merkel has insisted on the participation of banks, insurers and other private investors as a condition for bailouts, while ECB president Jean-Claude Trichet has opposed any move that would trigger swaps on concern it would reward speculators and spread contagion.

Those worries are misplaced in part because credit-default swaps are so small compared with the country’s overall debt, Tchir said. The net amount of Greek debt insured is $3.7 billion, according to the Depository Trust & Clearing Corp. That’s less than 1 percent of the government’s $477 billion of bonds and loans outstanding, Bloomberg data show.

“Banks are well prepared for the settlement of CDS,” Tchir wrote. “If the regulators and EU are sure the system can handle the bond write-offs, the write-offs for CDS are a rounding error, at best.”

--Editors: Michael Shanahan, Paul Armstrong

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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