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No Credit Event for Greece – For Now: Analyst

The International Swaps and Derivatives Association, which represents leading dealers in credit default swaps, meets on Thursday to decide whether the Greek debt swap in which investors will be forced to accept write-downs on their holdings of Greek debt constitutes a "credit event" which entitles them to compensation.

The Parthenon in Greece
Scott E. Barbour | Getty Images
The Parthenon in Greece

The debt swap is part of the package of measures agreed in February between Greece and international creditors in order to secure a second bailout for the country and avert default.

The meeting marks the first time ISDA has agreed to vote on the issue of compensation to holders of credit default swaps on Greece, policies insuring Greek bonds against default, and may result in the country being officially declared in breach of its obligations to investors in its bonds sooner than expected.

A "yes" vote by the 15-member committee could trigger the payment of billions of dollars in credit default swaps.

“There’s three types of credit events as defined by ISDA,” according to Gavan Nolan, Credit Analyst at Markit. “There’s a bankruptcy; a failure to pay; and a restructuring.”

“What we’re talking about here with Greece is a restructuring. A request is made to the ISDA Determinations Committee - which is the arbiter of whether a credit event has occurred - and they have to agree whether or not it is a credit event,” he told CNBC.

Out of the 15 members, 80 percent have to agree.

Only once before has there been a disagreement.

“It’s quite unlikely that ISDA will call it a credit event tomorrow,” Nolan said. “That seems to be the consensus in the market as well.”

“But I think further down the line, in a week or two, we could well see a credit event,” he added.

This particular request regarding Greece considers whether the fact that private investors have to accept losses of 53.3 percent on their debt holdings while the European Central Bank did not have to accept such a steep loss constitutes "subordination to the European Central Bank", Nolan said.

“There’s a lot of bondholders very angry about that, and they think that they’ve been subordinated to the ECB,” he added

Under ISDA definitions, a change in the ranking of payment priority, causing "subordination", can trigger credit default swap contracts.

Greece passed legislation last week allowing it to use so-called collective action clauses (CACs) to force private creditors into accepting big losses on the face value of their bonds.

The ECB already has already carried out a debt swap with Greece in which it was given new bonds not subject to CACs on outstanding Greek bonds, thereby protecting it against losses.

The activation of CACs would be a credit event because it would be binding on all bondholders – and that’s what defines a credit event, Nolan said.

“I think it’s likely that we’ll see that after the bond exchange period ends around March 8. If they don’t get the necessary participation, they’ll probably activate the CACs and that would determine a credit event,” he said.

However, if the CDS are triggered, the net volume of CDS on Greece now stands at $3.2 billion, according to the Depository Trust & Clearing Corporation, which holds data on credit default swap contracts.

“In terms of net notion outstanding, there’s just over 3 billion (euros) – it’s peanuts really compared to the government bond market.

So I think it’s sometimes overplayed as to how important it is,” Nolan said.