Greece bailout to trigger credit insurance payout

People walk past the Bank of Greece headquarters in Athens on March 7, 2012. LOUISA GOULIAMAKI/AFP/Getty Images

(MoneyWatch) The securities industry group that oversees financial derivatives has ruled that a financial rescue deal for Greecerepresents a "credit event," which could trigger payouts on $3.2 billion in credit insurance on the country's sovereign debt.

The International Swaps and Derivatives Association said on Friday that it had "resolved unanimously" that the bond swap, which most of Greece's investors and lenders agreed to this week, constituted such an event. That entitles investors to collect on credit default swaps they had purchased against Greek government debt.

Greece in February passed legislation inserting "collective action clauses," or CACs, into the country's bonds. In effect, that meant the government needed approval for the proposed bond swap from a majority of creditors, with their assent to the deal regarded as binding on all investors.

Greek officials said on Friday that 83.5 percent of its private-sector bondholders had agreed to the swap. That rate fell short of the 90 percent threshold required to compel holdout bondholders to participate in the deal. To ensure the bailout would go through, Greece's finance ministry got approval to use the CACs, which would bring the total investor participation rate to 96 percent. That move is what triggered the ISDA ruling.

Greek debt relief to trigger bond insurance payoutGreece secures high participation in bond swapQ&A: The Greek financial crisis

Negotiations over the bond swap had raised concern that Greece's bondholders could cause large financial losses by seeking to collect on the credit insurance. But those fears are expected to ease, with ISDA saying that overall payouts on CDS linked to Greek bonds will amount to less than $3.2 billion. That figure is down from about $6 billion covered by CDS last year, according to the Depository Trust & Clearing Corp. Lehman Brothers' bankruptcy in 2008 triggered a swaps settlement of $5.2 billion.

Some analysts believe the ruling will increase investors' willingness to buy sovereign debt, particularly in other European countries that need to raise money, because their investments will be protected through credit default swaps. Under Greece's deal, investors took a loss of 53.5 percent on the face-value of their holdings in exchange for new bonds with easier repayment terms.

  • Constantine von Hoffman On Twitter»

    Constantine von Hoffman is a freelance writer and writing coach. His work has appeared in outlets such as Harvard Business Review, NPR, Sierra magazine, Brandweek, CIO, The Boston Herald, TheStreet.com, CSO, and Boston Magazine.

Comments

Market Data

Market News

Stock Watchlist