No CDS payout, for now at least

Investors who have bet on a Greek default are not in for a windfall just yet, as the International Swaps and Derivatives Association (ISDA) decided on Thursday against pulling the payout trigger for the credit default swaps (CDS) for the time being, although it made it clear that this may change soon.

The ISDA committee met yesterday to discuss whether the European Central Bank and national central banks in the eurozone had been given preferential treatment by not being included in the Greek debt haircut, and whether the private sector involvement plan (PSI) constituted a credit event. Both suggestions were rejected by members of the association.

Nevertheless, it suggested in a statement that it will re-examine in a few days’ time whether the swaps should be activated. Their total current value adds up to 4.3 billion euros, down from about 6 billion euros last year.

“The situation in the Hellenic Republic is still evolving,” read the ISDA statement. It added that this decision should not dissuade its members from submitting questions such as those answered yesterday, nor does it mean that a credit event may not occur a few days later if further facts come to light. Such facts may be the activation of the collective action clauses, forcing reluctant bondholders to swap their bonds, or an even bigger haircut than the agreed 53.5 percent on Greek bonds.

On his way to Thursday’s Eurogroup meeting of eurozone finance ministers in Brussels, Deputy Prime Minister Evangelos Venizelos implied that an even greater haircut is not out of the question.

“Everyone realizes that we have four very significant and attractive facts in the context of the PSI,” he said, referring to the joint funding with the European Central Bank, the new bonds being issued under British law, the participation of the European Financial Stability Facility and the growth clause.

“This is a very good, unique offer; I am sure that the market understands very well how clear my message is,” he stated, effectively warning bondholders that they should take this offer or face bigger losses. 

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