It's for real this time.
The International Swaps and Derivatives Association determined today that Greece's bond swap has triggered a credit event.
That will lead to payouts of credit default swaps—essentially, insurance contracts on holdings of Greek bonds under Greek law—that investors purchased to hedge against the risk of holding Greek sovereign debt.
While expected, this is the icing on the cake of the first developed market default in 60 years.
An auction related to outstanding CDS transactions will be held on March 19. The committee asks that any investor wanting to participate in the auction notify ISDA immediately.
Provocation of a credit event has been a contentious topic in Europe during the last few months. On one hand, sovereign CDS contracts are the only securities that allow investors to hedge and speculate directly against governments. Because the market is so opaque and because many financial institutions are on both sides of this trade, credit default swaps have compounded concerns about the contagion that would occur as a result of a financial shock.
While the market for Greek CDS is relatively small, some traders and officials had been fearful that a credit event was still not fully priced in, and could have some negative consequences.
On the other hand, attempts to subvert existing CDS contracts would have also compromised investors' faith in EU leaders' willingness to stick to market rules. Analysts had feared that this distrust for sovereign credit default swaps would have spread into the corporate CDS market, destroying a major industry with far-reaching consequences.
It had become apparent in recent weeks that Greece was not going to significantly reduce its debt burden without forcing investors to participate in a structured default. Earlier proposals to keep the deal "voluntary" would likely not have received sufficient participation from investors to significantly reduce Greece's outstanding public debt.
ISDA's official statement on the credit event followed significant drama. It appears that a reporter for Derivatives Intelligence came by the report early and published an article saying that ISDA had confirmed the credit event. Here's our post on the drama >
Here's the official statement (pdf) confirming that a credit event had occurred:
EMEA DC Statement
March 9, 2012
In light of today’s EMEA Determinations Committee (the EMEA DC) unanimous decision in respect of the
potential Credit Event question relating to The Hellenic Republic (DC Issue 2012030901), the EMEA DC has agreed to publish the following statement:
The EMEA DC resolved that a Restructuring Credit Event has occurred under Section 4.7 of the ISDA 2003 Credit Derivatives Definitions (as amended by the July 2009 Supplement) (the 2003 Definitions) following the exercise by The Hellenic Republic of collective action clauses to amend the terms of Greek
law governed bonds issued by The Hellenic Republic (the Affected Bonds) such that the right of all holders of the Affected Bonds to receive payments has been reduced.
The EMEA DC has resolved to hold an auction with respect to the settlement of standard credit default swaps for which The Hellenic Republic is the reference entity. To maximise the range of obligations that market participants may deliver in settlement of any such credit default swaps, the EMEA DC has agreed to run an expedited auction process such that the auction itself will take place on March 19, 2012. In light of this expedited auction process, market participants should submit any obligations that they would like to include on the list of deliverable obligations to ISDA as soon as possible.
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