ISDA could scupper Greek bond deal

ISDA, the International Swaps and Derivatives Association, is to determine by committee later today whether the deal agreed on Greek bonds overnight constitutes a trigger for bond insurance payouts.

“ISDA, as secretary to the Determinations Committees, today announced that a question relating to a potential credit event with respect to the Hellenic Republic (Greece) has been submitted to, and subsequently accepted for consideration by, the EMEA Determinations Committee,” it said.

“The ISDA EMEA Determinations Committee will meet at 1PM GMT on Friday, March 9 to discuss the question and to determine whether a credit event has occurred.”

Any such announcement by ISDA’s EMEA Determinations Committee would hit the global swaps and derivatives markets, and potentially cause great problems for Europe’s financial system. One reason is because an official default of Greek bonds would imply that the guarantees from the broader eurozone are not good enough, throwing the spotlight on the ECB and its ability to manage a single currency across both a bankrupt member state such as Greece and the region’s most powerful economy Germany.

Europe’s political response through the structures of the EU, and monetary response through the ECB have steadfastly been based on the assumption that action taken to solve Greece’s crippling government debt would avoid the need for an official default to be called, and avoid the need for the ECB to become involved in an event that is was not properly designed to handle. Instead the central bank has been throwing money at Europe’s banks through its LTRO programme, to help create a financial firewall should Greece collapse and threaten the balance sheets of many of the region’s biggest lenders.

But, it is ISDA’s role to determine when bond defaults take place for purposes of  contracts such as credit default swaps. Ratings agencies have already said in recent weeks that the details of the latest Greek bailout effectively mean it is defaulting on its sovereign debt. However, it has not yet become an official default for the purposes of instruments that require this to be announced by ISDA.



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