The case of Greece casts doubt on the stock market

| March 10, 2012

The process of debt cancellation Greek has cast doubt on the functioning and effectiveness of non-payment of insurance contracted by the holders of sovereign bonds, with the possibility that other countries like Spain, Portugal and Italy also face restructuring.

For a relatively new market such as CDS (default insurance), the case of Greece has posed a challenge that has questioned the effectiveness of such insurance and the criterion of the ISDA, a body made up of banks and investment funds that monitors the activity of these financial instruments.

The CEO of the International Swaps and Derivatives (ISDA), Robert Pickle, has defended the actions of the entity to the Greek crisis and also the protocol for the implementation of insurance, agreed three years ago and “has endured the test of time. ”

Speaking to reporters after yesterday completed the first phase of the Greek debt cancellation, denied Pickle lack of transparency in the CDS market and justified the ISDA slow to activate the implementation of such insurance.

After a meeting of several hours, the ISDA, based in London, concluded late on Friday that the debt relief Greek-in which investors redeem their sovereign debt bonds for other less valuable, had been a failure ( “credit event”), which triggered the implementation of insurance.

It reached this conclusion because, to achieve desired debt-restructuring of 177,000 million euros in the first phase, the Greek government had to force the holders of bonds governed by the laws of that country to accept remove it.

According to Greece, voluntarily accepted the swap holders of 152,000 million of debt under Greek sovereignty (85.8%), but other investors in this category (25,000 million) declined, so that the Hellenic Government forced them to accept it by activating the collective action clauses (CAC ).

The application of these clauses, recently introduced by Greece in its legislation, was considered by the ISDA as a constituent of “credit event” or default, which in turn triggered the implementation of insurance policies, with an estimated value of 3,200 million U.S. dollars (2,420 million euros).

According to the Financial Times, investors have expressed anger at the slow pace shown by the ISDA, which last March 1 decided, after being asked by a market participant, that the introduction of the CAC by the Executive Greek was not an ” credit event “(for what is not activated then the CDS).

This created a cloud on the market, partially cleared last night but is still pending, it will not be until 19 March when the auction is held insurance of default associated with the Greek debt.

In this sense, the legal adviser to ISDA David Geen, estimates that the amount to be distributed to the holders of the CDS will be inferior to the 3,200 million, as it is understood that they have not lost the full value of your initial investment.

The effectiveness of CDS in a context of economic uncertainty, when fears that other euro area countries may have to restructure its debt, Pickle said “the important thing to remember is that this insurance is based on a legal contract” that has met, while important “carefully check the terms of that contract.”

“Investors should be aware that when they buy debt at a party may amend the terms of his contract (like the States in the case of sovereign debt), there is a risk,” he said.

However, Robert Pickle said that the payment of insurance in the next auction will not have a significant impact on financial markets, because “their exposure is small” and “is a public process.”

On the other hand, did not rule out the need to modify the ISDA protocol in terms of default insurance in the future “if so demanded by the market players.”

Category: Business News

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