Bloomberg News

Greece Collective Action Clauses Risk Triggering Default Swaps

February 24, 2012

Greece’s debt restructuring would trigger credit-default swaps insuring $3.2 billion of bonds if the government uses clauses designed to mop up investors unwilling to take part.

Greece published the formal offer document today for its agreement to exchange bonds for new securities, with investors taking a haircut of 53.5 percent. The restructuring uses so- called collective action clauses to discourage holdouts, the use of which would trigger credit-default swap insurance contracts on the nation’s debt, according to the rules of the International Swaps & Derivatives Association.

Greece negotiated the biggest debt restructuring in history as it seeks to reduce national debt to 120 percent of gross domestic product by 2020, from 160 percent last year, and to meet the terms of a 130 billion-euro ($170 billion) international bailout. An agreed debt swap, known as private- sector involvement, or PSI, will slice 100 billion euros off more than 200 billion euros of privately held debt if all investors participate.

“Anything that can help second bailout is going to be seen as positive,” said Harpreet Parhar, a strategist at Credit Agricole SA.

Outstanding Contracts

A total of 4,263 contracts were outstanding as of Feb. 17, according to the Depository Trust & Clearing Corp., which runs a central registry for the market.

It now costs $7.2 million upfront and $100,000 annually to insure $10 million of Greek debt for five years using the swaps, according to CMA. The 93 percent probability of default within that time assumes investors recover 22 percent of their holdings.

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.

The introduction of CACs doesn’t in itself trigger default swaps, though using them does, according to ISDA. Credit events that trigger swaps 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.

Any of these must result from a deterioration in creditworthiness, apply to multiple investors and be binding on all holders. ISDA’s determinations committee rules whether contracts can be tripped.

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

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

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