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Questions Remain on Greek Debt Swap Deal

Participation in the Greek debt swap deal by private sector creditors, integral to the latest bailout for the stricken country, is unlikely to reach a sufficiently high level to avoid credit default swaps being triggered, James Ashley, senior economist at RBC Capital Markets told CNBC.

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“There is a very real risk that credit default swaps will be triggered,” Ashley said. He warned private sector participation is unlikely to be high enough to avoid a negative effect on markets.

“It will be taken as a negative, there is no doubt about that. But because we’ve been talking about it for so long, people have been able to manage their positions, so it should not be seen as a catastrophic negative,” Ashley added.

As part of Greece’s 130 billion euros ($172 billion) bailout was that the private sector would take losses of 53.3 percent on its holdings of Greek government debt. The Greek government passed a bill late last month that introduced Collective Action Clauses – CACs – in the event that the take up of the swap which is officially voluntary would not be high enough, thereby forcing creditors to take the hit.

It is hoped that the move will wipe around 100 billion euros ($132 billion) from the country’s debt burden.

Charles Dallara, managing director of the Institute of International Finance, told CNBC last month that real losses for private sector bondholders will likely be upwards of 70 percent.

Reuters reported Tuesday that the IIF warned about the potential damaging ramifications of a disorderly Greek default and the high financial cost of a default across a number of euro zone countries as well as to the ECB itself.

Earlier this week there were reports that some private sector creditors were unsure about whether they would participate in the deal, which must be completed by Thursday evening.

However, 12 private creditors have confirmed they will take part in the Greek bond swap, after Greek Finance Minister Evangelos Venizelos was quoted in reports saying it was the best deal they would get.

Ashley said it was unlikely markets would see any contagion issues in the rest of the euro zone if the debt swap does not go as planned.


“The fallout should be limited because leaders have attempted to build a firewall around Greece,” he said.

Not everyone is so certain, however.

Aaron Gurwitz, chief investment officer at Barclays Wealth, warned that it’s the unknowns about the Greek story that are affecting market sentiment.

“We don’t know how this could play out and what dominoes would fall if the Greek situation played out poorly,” he said. “That’s the weapon that the Greeks have in making sure that owners of their bonds participate in this exchange.”

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