Why Greece Hasn't Defaulted On Its Debt—So Far

By: Michelle Caruso-Cabrera
Does Greece’s recent debt restructuring constitute a default? The widely-watched decision on Thursday was no—or at least not yet. 

Credit default swaps (CDS) are a form of insurance that investors can buy in case the issuer of a bond they’ve bought defaults, or can't pay them back in full. If there is a default, also known as a "credit event," the credit default swaps pay off the the bond investors.

Deciding whether there is a "credit event" is the job of a group called the International Securities and Derivatives Association. The ISDA decided Thursday that Greece had not, in fact, defaulted on its bonds so far.

However, Greece still faces several major events that are far more likely to lead to a default, which would trigger the CDS payouts.

The ISDA was asked to rule on two questions related to the Greek government’s recent offer to bond holders to pay them only 46.5 percent of what they are owed.

The first question was whether a recent bond swap between the European Central Bank  and the Greek government caused all other bondholders to be subordinated—or put behind the ECB is getting paid back. Subordination is usually one of the triggering events for payout of CDS insurance.

The ECB's bond swap with Greece didn't include the 53.5 percent haircut that the other bondholders faced. The ISDA was asked if this was not effectively a “subordination” of other debt holders. The committee of 15 voted unanimously no.

The second question was whether the current offer to bondholders, in and of itself, was a credit event. The committee also unanimously voted no.

Experts on CDS, and holders of Greek debt say these two votes aren’t necessarily noteworthy because they’ve been taken too early in the process to be meaningful.

For ISDA to vote that something constitutes a credit event, a bondholder first must not get paid back. So far, all bondholders have been paid in full.

The real test will come on March 20, when Greece has a debt repayment of more than $14 billion euros ($18.6 billion). Greece is hoping to complete a debt exchange before then that would cut that payment by more than 50 per cent.

As part of the offer, the Greek government has told bondholders they have the right to retroactively impose something called a “collective action clause.”

This means that if more than two thirds of bond holders agree to tender their bonds and take less money—the government can then impose the deal “collectively” on all the bondholders, even those who didn’t want to go along with it. That will be likely be decided by the end of next week.

At that point, the committee will have something real to consider rather than something that is currently only proposed or theoretical.

In fact, ISDA itself said: “The situation in the Hellenic Republic is still evolving and today’s decisions do not affect the right or ability of market participants to submit further questions... as to whether a Credit Event could occur at a later date.”

So this Greek drama isn’t done yet.

Just this morning, Pimco co-founder Bill Gross told CNBC that the decision on Greece is a "disappointment" to buyers of credit default swaps. Even so, Pimco—which is on the ISDA's voting committee—joined the other members in deciding there was no default.

Still, Gross suggested that Greece still could trigger a "credit event" that would cause future payouts on the credit-default swaps. He added, however: "If I were a buyer of protection on Greece and have seen the result this morning in terms of no protection, you know I would be upset."

When asked about this on Capitol Hill, Federal Reserve Chief Ben Bernankesaid that the question could be asked once again that if and when a collective action clause is imposed, then the question will likely be reconsidered. Nearly everyone involved in the process believes that would be a triggering event for CDS.

The European Union originally wanted to avoid the triggering of CDS payouts for fear the ripple effects would be similar to what occurred in the market post-Lehman Brother’s bankruptcy. But those fears have faded, as the possibility of a Greek failure has been priced into the markets.

πηγη:cnbc