Greek Deal Being Reviewed for Possible CDS Credit Event
The International Swaps and Derivatives Association has agreed to review whether Greece's bond deal is a credit event. Here's a Reuter's article and one from the WSJ.
The review hinges on the collective action agreement added to private bondholders, but not to bonds held by the ECB. That created a new seniority structure among holders by making the bonds held by the ECB senior to others. According to another WSJ article, "Under the 2003 Credit Derivatives definitions published by ISDA, a change in the payment priority ranking of any obligation, causing its subordination, is one of the events in restructuring that can trigger CDS for payouts--as long as it results from a deterioration in creditworthiness."
As you probably know, the Greek debt restructuring deal was crafted to be 'voluntary' specifically to avoid triggering payments on the credit default swap (CDS) contracts. This review puts the default swaps back in play.
The ISDA is scheduled to meet on Thursday to discuss the issue, but I didn't see any timeline for issuing a decision.
This seems like a big deal given all the debate and arm twisting that went in to getting the restructuring to be 'voluntary.' The takeaway I got from this (and might be a little off base) it that the ISDA is in a bit of a bind - it seems tough to twist a 50+% haircut plus new bonds at a very low coupon rate that didn't apply to all bond holders as anything other than a credit event. But, the financial and political powers have clearly been pushing to avoid having this be a credit event. IMHO, if ISDA doesn't rule this as a credit event, CDS on sovereign debt become nearly useless - and maybe that's not a bad thing.
The more I learn about bonds, the more I discover how much more there is to learn about bonds.