A massive debt relief deal for Greece constitutes a so-called credit event, meaning it will trigger payouts on bond insurance, the agency that oversees financial derivatives said.
The International Swaps and Derivatives Association said last night that its determinations committee “resolved unanimously that a Restructuring Credit Event has occurred with respect to The Hellenic Republic.”
That means holders of credit default swaps (CDS) on Greek bonds will be able to claim insurance payments as a result of Greece’s decision to force its debt holders into a bond swap.
There had been fears that the payout of such insurance could spark a cascade of losses for banks and other important investment funds.
But ISDA has said that overall payouts on CDS linked to Greek bonds will be less than €3.2bn (€2.43)bn, relieving fears that they could fell a big financial firm.
Greece would have risked defaulting on its debts in two weeks without the agreement, sparking turmoil in the financial markets and sending shock waves through the other 16 countries that use the euro.
Prime minister Lucas Papademos called the deal – which shaves some €105bn off Greece’s €368bn debt load – an important “historic success” in a televised address to the nation tonight.
“For the first time, Greece is not adding but taking debt off the backs of its citizens,” he said.
The country said 83.5% of private investors holding its government debt had agreed to a bond swap, taking a cut of more than half the face value of their investments as well as accepting softer repayment terms for Greece.
The radical swap aimed to put the country’s debt-ridden economy on the road to recovery, and was a key condition to secure a €130bn rescue package from other eurozone countries and the International Monetary Fund.
Charles Dallara, the managing director of the Institute of International Finance, which negotiated the deal with the Greek government on large investors’ behalf, described the bond swap as “the largest ever” restructuring.
“This has been painful and the pain is not over yet. But I now can see light at the end of the tunnel for the Greek economy,” Mr Dallara told Greece’s Mega television. He estimated Greece could return to the markets “within a few years” and said that if recovery continues, “I think the risk for Greece and the risk on the eurozone will be very manageable.”
Of the investors holding the €177bn in bonds governed by Greek law, 85.8% joined. The deadline for those owning foreign-law bonds was extended to March 23.
Creditors holding Greek-law bonds who refused to sign up will be forced into the deal – breaking a taboo that the eurozone had upheld until just weeks ago.
The decision to force losses on some bondholders means that the debt relief will trigger payouts of so-called credit default swaps, a type of insurance on bonds.
The International Swaps and Derivatives Association, the private organisation that rules on such cases, said its committee “resolved unanimously that a Restructuring Credit Event has occurred.”
When the debt relief plan was first announced last year, eurozone leaders and the European Central Bank worked hard to avoid a credit event because they feared the payout of credit default swaps could destabilise big financial institutions that sold them.
But since then, that prospect has started to look less threatening. The ISDA said that if triggered, overall payouts will be significantly below the $3.2bn (€2.4bn) in net outstanding CDS contracts linked to Greece. The exact level of payouts will be determined on March 19.
“We do not foresee a significant impact of the Greek credit event on financial markets,” ISDA CEO Robert Pickel said.
The Fitch ratings agency downgraded Greece to “restricted default” over the bond swap – a move that had been expected. Fitch was the third agency to downgrade Greece into default, after Moody’s and Standard & Poor’s. The agencies are expected to raise the country’s credit rating after the completion of the swap.
Earlier today, finance ministers from the 17-nation eurozone said Greece had fulfilled the conditions to get approval for the bailout next week. The IMF has set a tentative date of March 15 to discuss the size of its own participation.