A deal to relieve Greece’s debt burden would trigger a global credit event if forced on the nation’s bondholders, said Jim Millstein, the U.S. Treasury Department’s former chief restructuring officer.
Greek officials are seeking to reach an agreement with private creditors on a voluntary debt swap. If the government enacts legislation that compels full participation in the deal, it should trigger payouts on credit-default swaps, or CDS, that investors bought to insure against a default, Millstein said.
“This will be the largest CDS event we’ve ever seen in the private market,” Millstein said at the Bloomberg Sovereign Debt Crisis Conference hosted by Bloomberg Link in New York today. “And who’s swimming naked when that tide goes out?”
European finance ministers pushed Greece’s private creditors to accept bigger losses in talks that seek terms that won’t trigger the swap payments. Standard & Poor’s managing director of sovereign ratings, John Chambers, said today that the “very least” that may happen is a debt exchange that qualifies as a default by his firm’s criteria.
“Cast your mind back to 2008: One of the things that scared the regulators around the globe was whether or not markets could withstand a big CDS event,” said Millstein, a former Lazard Ltd. banker who last year founded his own turnaround advisory firm, Millstein & Co. “A lot of action was taken to avoid that. Here, it seems almost inevitable.”
The International Swaps and Derivatives Association, a trade body that declares credit events, has said that an agreement outlined last year wouldn’t trigger CDS bought by investors. If a Greek deal is binding for bondholders who haven’t agreed to a voluntary deal, the so-called holdout investors, then this will no longer be the case, Millstein said.
“If it’s made binding on holdouts, can ISDA really contend this is a voluntary restructuring and doesn’t trigger a restructuring credit event? I think not,” Millstein said. “If it’s made binding on holdouts, then it is a restructuring credit event and we’re going to see how the CDS market clears and if it clears.”
Millstein left Lazard in 2009 and helped Treasury Secretary Timothy F. Geithner oversee the $182.3 billion bailout of American International Group Inc. Part of the rescue was tied to the New York-based insurer’s CDS obligations linked to mortgage debt. Millstein also worked on Citigroup Inc.’s $45 billion bailout.
A proposal from the Institute of International Finance would lead to a loss of about 69 percent on the net-present value of Greek bonds, two people with knowledge of the talks said. Europe can’t let the deal disable the CDS market, Christian Clausen, president of the European Banking Federation, which represents the region’s banks, said in Stockholm today.