Bloomberg News

Greece Auction to Settle $3.2 Billion of Credit-Default Swaps

March 18, 2012

Pedestrians inside a shopping arcade in Athens, on March 14, 2012. Photographer: Petros Giannakouris/AP Photos

Pedestrians inside a shopping arcade in Athens, on March 14, 2012. Photographer: Petros Giannakouris/AP Photos

Credit-default swaps dealers will hold an auction today to settle as much as $3.2 billion of Greek bond insurance triggered by the nation’s debt restructuring.

The auction will be held under the rules of the International Swaps & Derivatives Association and will determine the amount that sellers of protection must pay by setting a recovery price for Greek bonds. An initial rate will be set at 11 a.m. London time with a final value determined at 3:30 p.m.

Greek credit-default swaps are being settled after investors were forced to exchange their bonds at a loss in the biggest ever debt restructuring. The auction ends more than two years of speculation over whether the derivatives are viable for insuring sovereign debt after European policy makers sought to prevent payouts on concern they’d worsen the region’s crisis.

“Triggering CDS might have more positive than negative implications for European government bond markets,” said Ioannis Sokos, a fixed-income strategist at BNP Paribas SA in London. “It’s a clear demonstration that there is a functioning hedging tool out there for holders of other peripheral bonds.”

Sellers of protection will pay buyers face value in exchange for the underlying securities or the cash equivalent. The results of the auction will be posted on Creditfixings.com, a website run by Creditex, a New York-based derivatives broker, and financial information provider Markit Group Ltd.

Portugal Risk

Investor concern that Portugal will follow Greece in seeking to reduce its debt burden by imposing losses on private bondholders has driven up the cost of insuring $10 million of that nation’s debt for five years to $3.65 million in advance and $100,000 annually. The price of credit-default swaps signals a 66 percent chance of default, according to CMA.

Former European Central Bank President Jean-Claude Trichet led opposition to triggering Greek swaps on concern traders would be encouraged to bet against failing nations and profit from the region’s sovereign debt crisis.

In Greece’s restructuring, investors were forced to write off more than 100 billion euros ($132 billion) of debt in return for new bonds worth 31.5 percent of their original investment. investment. Contracts wouldn’t have been triggered if the debt exchange had been voluntary, according to ISDA’s rules.

“If Greece and EU authorities had invalidated the reason for existence of CDS contracts, this could create selling pressures on other peripheral bond markets,” BNP’s Sokos said.

Traders will set a recovery rate for the bonds of about 20 cents on the euro, causing a swaps payout of 80 cents, based on the price of the new 30-year Greek securities. Investors are using the longest-dated notes to calculate the settlement, according to Alessandro Giansanti, a senior rates strategist at ING Groep NV.

“It’s positive for the CDS market because the meaning of the instrument is to protect against default,” said Amsterdam- based Giansanti. “It’s important to give investors a way to hedge exposure.”

To contact the reporter on this story: Abigail Moses in London at Amoses5@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net


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