IMF to consider €28bn loan to Greece

Greece’s use of collective action clauses (CAC) forcing investors to take losses under its debt restructuring has triggered payouts on $3bn of default insurance, the International Swaps & Derivatives Association said.

Meanwhile, the IMF will next week consider making a loan worth €28bn to Greece over a four-year period, as part of a second international bailout package for Athens.

The loan size would be at the upper end of the amount expected, and for a year longer than similar IMF programmes.

IMF managing director Christine Lagarde said that after consulting with the IMF’s executive board, she would recommend it approve an extended fund facility to help support Greece in restoring its competitiveness and undertaking sustained and deep structural reforms.

“The scale and length of the fund’s support is a reflection of our determination to remain engaged,” she said.

It came as it emerged a total 4,323 credit-default swap contracts may now be settled after the association’s determinations committee ruled the use of CACs is a restructuring credit event, according to a statement distributed by Business Wire.

Before the ruling, Greek swaps rose to a record $7.68m in advance and $100,000 annually to insure $10m of debt for five years.

Swaps traders will hold an “expedited” auction on Mar 19 to “maximise” the number of bonds that can be used to set payout amounts on the contracts, New York-based association said on the committee’s website yesterday.

Auctions, which set a recovery value on the underlying bonds, are typically held about a month after credit events are triggered.

A swaps trigger “raises the question of which country is next, and which banks are most exposed,” Hank Calenti, a bank analysts at Societe Generale in London, wrote in a note. “Less than six months ago we had the head of the ECB exhorting that there must be no credit event on Greece,” he wrote.

A settlement may bolster confidence in the $257bn government-debt insurance market after Greece’s restructuring tested the viability of default swaps as a hedge. Greece reached its target for participation in the debt restructuring after using CACs to force the hand of holdouts, with investors in 95.7% of the bonds taking part.

Policy makers, including former ECB president Jean-Claude Trichet, opposed payouts on Greek credit-default swaps on concern traders would be encouraged to bet against failing nations and worsen the region’s debt crisis.

While policymakers had hoped to achieve debt sustainability in Europe’s most indebted nations without triggering default swaps, political determination to avoid the stigma of a credit event waned as Greece struggled to meet the terms of its bailout.

Standard & Poor’s downgraded the nation to selective default on Feb 27 after the government retroactively inserted CACs into bond terms.

Credit-default swaps on Greece now cover $3.16bn of debt, down from about $6bn last year, according to the Depository Trust & Clearing Corporation.

That compares with a swaps settlement of $5.2bn on Lehman Brothers Holdings in 2008.

— Bloomberg


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