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What Happens If Greek Debt Swap Deal Fails?

Wednesday, 7 Mar 2012 | 6:33 AM ET

Greece has come back to the forefront of the markets’ agenda over concerns about its debt restructuring package, with fears that the troubled euro zone country may finally default on its debt repayments.

CNBC.com

Yet many in the market believe that, even if the deal fails to achieve its goal of getting 90 percent of its bondholders on side (which looks increasingly likely), the effect on markets would be minimal.

The possibility of a Greek default has hung over global stock markets for many months now.

“Everyone knew it was going to default a year ago,” Peter Toogood, head of investment at Old Broad Street Research, told CNBC Wednesday. “Portugal and Ireland will need another bailout too. These are evolving programs of austerity and bailouts.”

On Tuesday,Greece made it clear that it would not pay bondholders who refused take part in the debt swap program in an effort to sway those who are still undecided.

Hedge funds are believed to form a large part of the bondholders who are digging their heels in.

If participation falls below 75 percent, the second bailout is likely to fail and Greece could default, leaving its creditors — including the “troika” of the International Monetary Fund , European Central Bank , and the European Commission — with hefty losses on its debt.

If Athens cannot sign up the required 90 percent of bondholders needed to push through the debt haircut and bailout, it may have to use new legislation for Collective Action Clauses, or CACs.

Greek Government Confident of 75% to 80% Debt Swap Participation
Peter Toogood, director of investment at Old Broad Street Research, told CNBC, "the fact the Credit Default Swaps weren't triggered is causing some consternation anyway, regardless of whether you get some 90% or whatever, I personally would love it if it didn't go through just to watch the CDS triggered."

In either of these scenarios, credit default swaps, the insurance investors use to hedge against debt defaults, on Greek debt could be triggered — which may spark a feared market panic.

“The triggering of CDS should not be a surprise. It’s a mark to reality and the right thing to do, and should be a positive aspect,” Padhraic Garvey, head of developed markets rates and debt strategy at ING Wholesale Banking, told CNBC.

There is already “anger” from fixed income managers that CDS haven’t been triggered yet, according to Toogood.

“It’s incredible and there’s an awful lot of anger about it. If CDS are triggered, it means they’re worth something,” he said.

CDS were last in the limelight at the start of the current financial crisis, when they were blamed for the collapse of investment bank Lehman Brothers.

A trigger of CDS is already priced into the foreign-exchange market, according to Steven Saywell, European head of currency strategy at BNP Paribas.

He believes that there is potential for the euro to rebound on a successful deal.

The sovereign bond market for Greece and other euro zone countries could also be affected.

“They’re a very small component of the market in sovereign bonds, so I don’t think it would have a huge impact,” Saywell told CNBC. “However, the markets are not going to take anything for granted until this is actually signed.”

Fears of contagion spreading to other euro zone countries have colored the negotiations with Greece. Portugal and Ireland, which both took bailouts around the same time as Greece’s first bailout, are often reported to be next in the firing line.

“Portugal and Ireland are two very different cases,” Harvey said. “Ireland has the confidence of the capital markets. Portugal is still speculative grade and that has led to capitulation selling.”

He added: “The Greek deal doesn’t necessarily need to have specific ramifications on Ireland and Portugal. For Ireland, it’s more about the referendum and for Portugal more about getting the job done internally.”

Contact Europe: Economy

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