ISDA data points to pain for creditors, not insurers of Greek credit

Data published by the International Swaps & Derivatives Association (ISDA) and the Depository Trust & Clearing Corporation (DTCC) suggest it is creditors rather than their insurers that will bear the brunt of any failure to avoid a default on Greek debt

Reports earlier this week suggested talks between Greece and its private creditors had broken down.

What is definitely known is that so far the industry has avoided officially defining Greece as being in default on its sovereign debt, thus triggering a so-called “credit event” and therefore credit insurance payouts. According to ISDA rules there are three ways that a credit event can be triggered for Western European debt: failure to pay, repudiation/moratorium and restructuring.

Yet even if one of the triggers were to be pulled on Greece, then, according to ISDA data, the credit insurance sector would not be required to deliver massive payments.

Figures published in a “Q&A” document this week point to net insurance exposure on credit default swaps of about $3.7bn – virtually a drop in the bucket of overall sovereign debt under threat from the region’s financial problems.

“According to the Depository Trust & Clearing Corporation’s CDS data warehouse, the total net exposure of market participants who have sold CDS credit protection on Greek sovereign debt is approximately $3.7bn as of 10-21- 2011,” ISDA wrote.

“This figure is calculated by summing the net exposures of the protection sellers, and so it is impossible for any one firm selling protection to have more than $3.7bn in exposure and, of course, given that there are many net sellers, any one seller’s exposure is likely to be far less. Also, firms’ net exposures are partially offset by the recovery value of underlying obligations.

“For example, if the CDS auction showed the recovery value of debt to be (hypothetically) 50%, the maximum aggregate amount payable would, in Greece’s case, be 50% of $3.7bn: $1.85bn. Furthermore, statistics indicate that, on average, 70 per cent of derivatives exposure is collateralised and the level of CDS collateralization is likely to be even higher as over 90% of CDS transactions (by numbers of trades) are collateralised. Thus, in this example, of the $1.85bn payable, about $1.5bn has effectively already been paid.”

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