Greece debt crisis triggers massive credit default contract swap worth billions

March 10, 2012 – GREECE – It’s for real this time. The International Swaps and Derivatives Association determined today that Greece’s bond swap has triggered a credit event. That will lead to payouts of credit default swaps—essentially, insurance contracts on holdings of Greek bonds under Greek law—that investors purchased to hedge against the risk of holding Greek sovereign debt. While expected, this is the icing on the cake of the first developed market default in 60 years. An auction related to outstanding CDS transactions will be held on March 19. The committee asks that any investor wanting to participate in the auction notify ISDA immediately. Provocation of a credit event has been a contentious topic in Europe during the last few months. On one hand, sovereign CDS contracts are the only securities that allow investors to hedge and speculate directly against governments. Because the market is so opaque and because many financial institutions are on both sides of this trade, credit default swaps have compounded concerns about the contagion that would occur as a result of a financial shock. While the market for Greek CDS is relatively small, some traders and officials had been fearful that a credit event was still not fully priced in, and could have some negative consequences. On the other hand, attempts to subvert existing CDS contracts would have also compromised investors’ faith in EU leaders’ willingness to stick to market rules. Analysts had feared that this distrust for sovereign credit default swaps would have spread into the corporate CDS market, destroying a major industry with far-reaching consequences. It had become apparent in recent weeks that Greece was not going to significantly reduce its debt burden without forcing investors to participate in a structured default. Earlier proposals to keep the deal “voluntary” would likely not have received sufficient participation from investors to significantly reduce Greece’s outstanding public debt. –Business Insider

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