Newspaper article International Herald Tribune

Payments Ruled out on Greek Debt Swaps ; Industry Arbiter Decides That Bailout Did Not Activate Default Protection

Newspaper article International Herald Tribune

Payments Ruled out on Greek Debt Swaps ; Industry Arbiter Decides That Bailout Did Not Activate Default Protection

Article excerpt

But the International Swaps and Derivatives Association also warned on Thursday that the situation in Greece was "still evolving" and that such payouts might be necessary in the future.

A trade group and arbiter for the derivatives industry said Thursday that based on current evidence, the Greek bailout would not prompt payments on the credit-default swaps linked to the country's bonds.

But the organization, the International Swaps and Derivatives Association, warned that the situation in Greece was "still evolving" and such payouts might be necessary in the future "as further facts come to light."

In the midst of the Greek drama, credit-default swaps, insurancelike instruments intended to protect against losses on debt, have once again raised worries.

During the financial crisis of 2008, derivatives contributed to the mess. Banks feared that their trading partners might not make good on their obligations, a situation that panicked the markets and nearly brought the financial systems to its knees.

As part of Greece's restructuring, bondholders will be required to take a loss of more than 70 percent on their holdings. When first announced, the deal was proposed as a voluntary exchange, which would not have activated the credit-default swaps. But in recent weeks, Greece has prepared to require all private bondholders to accept the losses through legal means. This would make the exchange involuntary and almost certainly set off the swaps.

This week, two undisclosed parties asked the derivatives group to rule on whether various aspects of the Greek debt exchange would necessitate swap payments.

One party raised a specific issue, related to the European Central Bank. While private bondholders will take a loss on their holdings, the E.C.B. was able to avoid those losses by striking a separate deal with Greece. The party wondered if that qualified as "subordination" and would prompt swap payments.

Another party took a broader approach, asking if any part of the proposed Greek debt exchange -- and the resulting losses -- would activate the swaps. …

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