With many strangely enough surprised by the Greek credit event, let’s review the definition of a credit event. From Credit Derivatives:
Bankruptcy in the 1999 Definitions mirrors the wording of Section 5(a)(vii) of the ISDA Master Agreement. It is widely drafted so as to be triggered by a variety of events associated with bankruptcy or insolvency proceedings under English law and New York law, as well as analogous events under other insolvency laws.
ISDA is aware that the scope of the definition of Bankruptcy may be wider than insolvency-related events falling within the credit assessment criteria used by rating agencies. Certain actions taken by the reference entity, for instance, a board meeting or a meeting of shareholders to consider the filing of a liquidation petition, could be argued as being in furtherance of an act of bankruptcy and thus triggering a Credit Event, even though such act would not generally be considered a bankruptcy event in the context of credit assessment by a rating agency. Therefore, the inclusion of this Credit Event could provide credit protection ahead of such circumstances.
By contrast, a guarantee would not typically provide any protection against insolvency-related events ahead of an actual failure to pay.
Comments on the Greek Deal. Courtesy Copper at BGC.
One of the 17 Eurozone countries has now defaulted (whatever the politicians and policymakers say)
E152bn of Greek law bonds were tendered for the debt swap, out of E177bn – a participation rate of 85.8%. Athens has triggered the Collective Action clause to force participation for the rest, therefore all the E177bn will be exchanged. Of the foreign law bonds, E20bn was tendered for the debt swap, a 69% participation rate. To try and persuade these holdouts to follow the herd and participate too, the Greek government has extended the deadline for acceptance (just for these foreign law bonds) until 23rd March. So the E177bn of Greek law bonds and the E20bn of foreign law bonds equates to a total of E197bn of bonds being swapped, or 95.7% of the total bonds outstanding. That meets the debt write down targets of the IMF and EU.
“Customers” that accepted ISDA documentation when buying credit default protection on Greece are now discovering that ISDA defends the position that a 50% discount on Greek debt is “voluntary” and therefore not a credit event for credit default swap payment purposes according to its documents. This makes the ISDA “standard” credit default swap (CDS) ineffective as a hedge for the widened spreads (reduced price) of Greek debt, and it makes it ineffective as a protection against default using reasonable standards of impairment to define default. ISDA can defend ambiguous definitions so that payment on the credit default swap is virtually impossible. (Tavakoli)
Further Credit reading Greek CDS.