Greek Bonds Slump Below 20 Cents on Euro Amid Swap Concern

Greek 10-year bonds slumped to a record on concern the nation will use collective action clauses, or CACs, to enforce losses on bondholders.

The price of the 5.9 percent bond maturing in October 2022 dropped to 19.14 cents on the euro even after the International Swaps & Derivatives Association ruled that insurance against bondholder losses doesn’t need to be paid as yet. ISDA’s determinations committee said today the situation is “still evolving” and it may rule in favor of a payout for credit default swaps on Greek bonds in the future.

“What the market is focused on now is whether the activation of the collective action clauses will be a credit event,” said Mohit Kumar, the head of European fixed-income strategy at Deutsche Bank AG in London. “There is uncertainty surrounding that and the ISDA can only rule on that after the CACs are triggered. The consensus view in the market is that if the CACs are triggered then it will be a credit event.”

Greece’s 5.9 percent October 2022 bond yields advanced 154 basis points, or 1.54 percentage points, to 36.33 percent at 2:05 p.m. London time.

The price of 4.3 percent notes maturing this month fell 0.885, or 8.85 euros per 1,000-euro ($1,330) face amount, to 24.285. The price has slid after reaching 42 on Feb. 16.

‘Plenty of Risks’

Euro-region finance ministers are meeting today to approve a 130-billion euro bailout for Greece that includes a plan to slice about 100 billion euros off more than 200 billion euros of privately-held debt using a bond exchange. The government is seeking a 90 percent participation rate and set a 75 percent rate as a threshold for proceeding with the transaction, according to a Feb. 24 statement.

“The market is still pricing in plenty of risks that the deal does not go as planned and that there will be a hard default,” said David Zervos, head of global fixed-income strategy at Jefferies & Co. in New York. “It is shunning these assets because they are worth very little. There is no event of default yet, but the market is pricing that there will be a default when the collective action clauses are used.”

The additional yield investors demand to hold Greek 10-year bonds instead of benchmark German debt rose to 34.46 percentage points, after reaching a record 34.71 points yesterday.

Political determination to avoid the stigma of a credit event has been waning as Greece struggles to meet the conditions for a second bailout. Standard & Poor’s downgraded the nation to “selective default” on Feb. 27 because of the government’s decision to retroactively insert CACs into bond terms.

S&P dropped Greece’s rating from CC, following a reduction last week by Fitch Ratings to C. Moody’s Investors Service has said it will cut the nation to its lowest rating.

Greece’s debt exchange plan aims to reduce national debt to 120.5 percent of gross domestic product by 2020, from 160 percent last year.

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