Credit Default Swaps were triggered by Greek’s historic debt restructuring deal, announced this morning, which saw a majority of private bondholders accept losses that allowed the Mediterranean country to shave its debt down by more than US$131 billion. Since so many Greek bondholders approved the restructuring deal, the Greek government was able to initiate collective action clauses, effectively forcing bondholders not participating in the deal to accept the losses others had agreed to. As the Wall Street Journal reported, this is what led the International Swaps and Derivatives Association, an organization that rules on credit events, to deem that Greece had defaulted on its debt.
But the ISDA also said that the CDS payments—totaling about US$3.2 billion—are sufficiently spread out and are likely too small to cause significant damage to any single financial institution. That was the big fear among economic analysts regarding the prospect of a Greek debt default. So far, though, those fears don’t appear to have materialized.
Friday, March 9, 2012