Greece Deal Won't Lead to Lehman-Like Event: Dallara
CNBC Chief International Correspondent
The deal that allowed Greece to renegotiate its debt will not lead to a credit event on the scale of the Lehman Brothers failure that triggered the US financial crisis, the lead negotiator in the talks told CNBC.
Charles Dallara, head of the Institute of International Finance, said the Greek debt dealis "voluntary" and agreed to after a "marathon session" with European leaders that lasted well into the night. He said it is unlikely to cause a major problem in the market for credit default swaps , which are triggered in the case of debt defaults.
The deal will result in Greek debt holders absorbing a nominal 50 percent loss and the nation's total debt load reduced by 100 billion euros.
"We're not responsible for making those judgments" regarding credit default swaps, Dallara said. "It's our understanding that this being judged a voluntary agreement by participants meets the terms and conditions... It was very important to provide a substantial amount of collateral — 30 billion euros — to help underpin the value of the new bonds."
Supporting the new bonds is crucial, he said, because “the new claims will be of higher quality (compared to the old claims) due to the funds provided.” That's a crucial condition to avoid having the debt exchange labeled as involuntary.
"I think it was huge to avoid an event," Dallara said. If it had not been voluntary, it "would have created a calamity."
There remained wariness, however, over how the deal will be perceived.
"While voluntary is what Europeans want, the deal last night was voluntary at the point of a gun," said Peter Boockvar, equity strategist at Miller Tabak. "If (the International Swaps and Derivatives Association) declares this strong arming combined with a 50 percent cut in the value of Greek debt voluntary, it will make a complete joke of sovereign CDS and will potentially destroy this market to the point where it will go away.
The ISDA, in a statement, confirmed that it is viewing the deal as voluntary, though it said it is not at the point where it is evaluating whether a technical credit event has occurred.
However, bond holders facing a 50 percent haircut still could trigger a credit event, though the chances of that happening appear remove for now.
The ISDA would only declare a credit event if it asked to do so, so if none of the bond holders petition the organization there will be no decision. The majority of private holders of Greek debt are banks, and since they are agreeing to the deal they are unlikely to ask the ISDA for payment on any of the CDS they hold.
The relatively small pool of nonbank bond holders face two choices: Go along with the deal or ask for payoffs on their CDS. In the latter event — if that private group is indeed small — Greece may choose to pay the them at full premium rather than risk the ISDA declaring a credit event. This group, known as "free riders," would get 100 cents on the dollar and turn out big winners.
Conversely, Greece may not choose to pay them. If that happens, and those bondholders also hold CDS insurance, they can petition the ISDA for their insurance payment. This group, though, is not expected to be large enough to trigger a Lehman-like ripple effect across the capital markets.
The dilemma is possibly only because more than 90 percent of Greek debt is written under Greek law. According to the ISDA, most Greek bonds don't have a collective action clause, or a CAC. That means the minority bondholders don't have to go along with the majority as they did, for example, in the case of General Motors.
If there were a CAC, then those who didn't want to go along would have no choice.
The market also could see increased risk in Italy and Spain for the simple reason that the European Unionhas backtracked on its previous position that European sovereign debt should be judged as risk-free.
"It was important for all of us at the same time to shore up the credibility of all the other sovereign credits and that has been accomplished by the firewall arrangements," Dallara said.
As a result, when it comes to the possibility of the credit markets going after Italy, he said, “I don’t see that happening. Italy is now in the process of rebuilding its credibility and that was reinforced this week by the measures they are taking."