Greek bond swap triggers CDS

Greece1Greece has met conditions for a second bailout worth €130 billion by persuading investors to accept big losses on its sovereign bonds. But the use of collective action clauses to force unwilling investors to accept the deal has angered some and prompted the International Swaps and Derivatives Association to declare that the event triggers credit default swaps. The fact that the collective action clauses were retrofitted to the domestic bonds means they are potentially open to a legal challenge from those investors who want to hold out for full repayment, say lawyers. However, these holdouts are the exception not the rule, as 85.8% of private bondholders chose to participate in the debt swap, and with the collective action clauses, participation has risen to more than 95%. “The good news is this deal averts the risk of a hard default on the March bond maturity and it lowers future systemic risk from Greece since the share of post-PSI [private sector involvement] debt in private hands is cut,” said Tristan Cooper, sovereign analyst at Fidelity Worldwide Investment. “The bad news is Greece remains in a very difficult economic situation; a eurozone exit may still be on the cards if the second Troika programme proves unworkable.” Investors are now assessing whether the bond swap will help Greece achieve its target of reducing its debt-to-GDP ratio to 120% by 2020. A number of observers, including German finance minister Wolfgang Schaeuble, have said the country may need to resort to a third bailout. ©2012 funds europe

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