Friday, February 24, 2012

Greece Collective Action Clauses Risk Triggering Default Swaps

February 24, 2012

Greece’s debt restructuring would trigger credit-default swaps insuring $3.2 billion of bonds if the government uses clauses designed to mop up investors unwilling to take part.

Greece published the formal offer document today for its agreement to exchange bonds for new securities, with investors taking a haircut of 53.5 percent. The restructuring uses so- called collective action clauses to discourage holdouts, the use of which would trigger credit-default swap insurance contracts on the nation’s debt, according to the rules of the International Swaps & Derivatives Association.

Greece negotiated the biggest debt restructuring in history as it seeks to reduce national debt to 120 percent of gross domestic product by 2020, from 160 percent last year, and to meet the terms of a 130 billion-euro ($170 billion) international bailout. An agreed debt swap, known as private- sector involvement, or PSI, will slice 100 billion euros off more than 200 billion euros of privately held debt if all investors participate.

“Anything that can help second bailout is going to be seen as positive,” said Harpreet Parhar, a strategist at Credit Agricole SA.


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