The European Union’s agreement with investors for a voluntary 50 percent writedown on their Greek bond holdings means $3.7 billion of debt-insurance contracts won’t be triggered, according to the International Swaps & Derivatives Association’s rules.
ISDA will decide if the credit-default swaps should pay out depending on whether it judges losses to be voluntary or compulsory. European leaders said in today’s agreement they “invite Greece, private investors and all parties concerned to develop a voluntary bond exchange” into new debt.
A last minute agreement was reached after banks, the biggest private holders of Greece’s government bonds, were threatened with a costly full default, according to Luxembourg Prime Minister Jean-Claude Juncker. The involvement of the Institute of International Finance, which represents lenders, also helped progress toward an accord that the EU could portray as non-mandatory.
“As long as the agreement is voluntary, then CDS aren’t triggered,” said Cagdas Aksu, an analyst at Barclays Capital in London. “Provided it’s voluntary, CDS wouldn’t be triggered unless the Greeks missed a payment.”
David Geen, ISDA’s general counsel in London, didn’t immediately respond to e-mailed questions.
Greek bonds soared and the euro strengthened. The yield on the 10-year note dropped to 24.16 percent as of 10:10 a.m. in London, from 25.32 percent yesterday and compared with 12.5 percent at the end of last year. The 17-nation common currency gained to a 1 1/2-month high of $1.3998 from $1.3906 the day before, adding to its 4.6 percent advance this year.
The cost of insuring Greek debt fell. Credit-default swaps backing $10 million of the nation’s bonds for five years cost $5.6 million in advance and $100,000 annually, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. That implies an 85 percent chance of default assuming investors recover 32 percent of their holdings. The probability is down from 90 percent yesterday, when the upfront cost was $6 million.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
The net notional value of default swaps outstanding on Greece has fallen from $5.3 billion at the start of the year, according to the Depositary Trust & Clearing Co., which maintains a warehouse of trading data. The total is a fraction of the $390 billion Greek bond market.
“Obviously the plan is for the haircut on Greek debt not to trigger Greek CDS contracts,” said Marchel Alexandrovich, an economist at Jefferies International Ltd. in London.