Greek Default Swap Trades Reported for First Time Since 2012

Trading in credit-default swaps tied to Greek government bonds has been reported by the Depository Trust & Clearing Corp. for the first time since the country undertook the biggest sovereign debt restructuring more than two years ago.

There were 74 trades covering a gross $165 million of Greek debt last week, according to the DTCC, which runs a central registry for the market and publishes data for the 1,000 most-traded entities. A total of 292 contracts protecting a net $505 million of bonds are now outstanding, the data show.

Previous contracts insuring about $3 billion were settled in March 2012, when Greece forced investors to exchange their bonds at a loss as part of the debt restructuring. Investors started buying protection again after the nation returned to the international bond market in April after a four-year exile.

“It’s a step towards more normal markets in Greece,” said Athanasios Vamvakidis, the head of Group of 10 currency strategy at Bank of America Corp. in London. “Having an instrument to hedge will help Greece increase market access.”

While dealers began offering default swap prices last year, trading volumes were too low to be captured by the DTCC. The amount outstanding is still among the least for European governments, trailing swaps covering about $550 million of Norway’s bonds and $20 billion of Italy’s debt.

Shrinking Market

The market for credit-default swaps on government debt has shrunk since the European Union introduced rules in 2012 to curb speculation. Investors now have to prove that the protection they buy is proportional to their holdings of government bonds or other correlated securities, while so-called naked swaps are banned.

Trading ceased on the Markit iTraxx SovX Western Europe Index that was created in 2009 to help investors mitigate government credit risk, with the volume of deals on the 14 nations in the benchmark dropping to a record $75 billion this month from $135 billion in 2011. EU members were also removed from a swaps index for central and eastern European nations.

“The Greek CDS market and the European CDS market are shadows of their former selves,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London. “Debt sustainability is a major issue in Greece. Almost certainly there’s going to be another debt restructuring.”

It now costs 450 basis points to insure Greek bonds for five years, signaling a 33 percent chance of default within that time, according to CMA.

Argentina Deadline

A basis point on a credit-default swap protecting $10 million of debt from default for five years is equivalent to $1,000 a year. 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 re-emergence of Greek default swaps comes as Argentina approaches a deadline tonight to repay its debts. Failure to do so will make the South American country the first sovereign failure since Greece, and the second since the settlement process for derivatives trades was standardized in 2009.