Pacific Investment Management Co.’s Bill Gross, whose firm is a member of the committee that decides whether default insurance on Greek debt will pay out, said the group will probably make one more decision on the issue.
The International Swaps & Derivatives Association said today that credit-default swaps tied to Greek debt won’t be paid out after it was asked to rule whether part of the nation’s $170 billion bailout was a credit event. The group said the European Central Bank’s exchange of Greek bonds for new securities exempt from losses being imposed on private investors hasn’t triggered $3.25 billion of outstanding credit-default swaps.
“It’s not a slam dunk,” Gross, manager of the world’s biggest bond fund, said today in a Bloomberg television interview on “Surveillance Midday” with Tom Keene. “We expect the next few days, perhaps next few weeks, to ultimately send the ISDA committee back for one final vote.”
ISDA’s determinations committee, which also includes JPMorgan Chase & Co., said the switch didn’t constitute subordination, one of the criteria for a payout under a restructuring event. Pimco, which oversees more than $1 trillion in assets, doesn’t own any debt of Greece, Gross said.
A swaps payout may still happen if Greece uses collective action clauses on private investors who refuse to take losses on their debt holdings, according to ISDA’s rules. Officials including former ECB President Jean-Claude Trichet have opposed triggering swaps because they’re concerned traders would be encouraged to bet against failing nations and worsen Europe’s debt crisis.
“We don’t see anything wrong with it,” Gross said of an ISDA ruling that would trigger default swaps to pay out. “These technical legal problems would really denigrate the entire market and ultimately will affect the market for CDS if one side is aggrieved as opposed to the other.”
It costs $7.3 million in advance and $100,000 annually to insure $10 million of Greek debt for five years, signaling a 95 percent probability of default within that time. Greek 10-year bonds slumped to a record 19.14 cents on the euro after the ruling.
Credit-default swaps on Greece now cover $3.25 billion of debt, down from about $6 billion last year, according to the Depository Trust & Clearing Corp. That compares with a swaps settlement of $5.2 billion on Lehman Brothers Holdings Inc. in 2008.
“It seems to us that there has to be a final result in terms of the exchange,” Gross said from Pimco’s headquarters in Newport Beach, California. “At that point things will happen from the standpoint of the EU and things will happen from the standpoint of Greece that are not known yet. At that point, I would expect the committee to go back and to make one final judgment based upon those ultimate results.”
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