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Thursday, October 27, 2011
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by Louise Bowman
ISDA released a statement 27 October explaining its position. The determination of whether the eurozone deal with regard to Greece is a credit event under CDS documentation will be made by ISDAs EMEA Determinations Committee when the proposal is formally signed, and if a market participant requests a ruling from the DC, it said. Based on what we know it appears from preliminary news reports that the bond restructuring is voluntary and not binding on all bondholders. As such, it does not appear to be likely that the restructuring will trigger payments under existing CDS contracts. In addition, it is important to note that the restructuring proposal is not yet at the stage at which the ISDA Determinations Committee would be likely to accept a request to determine whether a credit event has occurred.
By this logic a haircut of 100% will not be deemed a credit event as long as it is voluntary. Sovereign CDS will only be triggered if participation is compulsory and binding on all holders. It is likely that the 50% figure is as much as bondholders were prepared to stomach on a voluntary basis. The net notional amount of Greek CDS outstanding is only $3.7 billion. According to ISDA, firms net exposures are partially offset by the recovery value of underlying obligations. For example, if the CDS auction showed the recovery value of debt to be (hypothetically) 50%, the maximum aggregate amount payable would, in Greeces case, be 50% of $3.7bn: $1.85bn. On average, 70 per cent of derivatives exposure is collateralized.
The aim of the haircut is to achieve 100 billion of burden-sharing with the private sector to get the countrys debt:GDP ratio to 120% by 2020. Under the arrangement outstanding bonds face a NPV reduction of nearly 70%. The yield on Greek bonds due in October 2022 fell 117 basis points to 2,415 basis points on the news.
Greek solution unlikely to trigger CDS Hedges unwound over summer; significant latitude to avoid trigger Thursday, October 6, 2011
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