CommunityThe Bullpen

Derivatives Governing Body Says Greek Debt Swap Not Default Event

Well that’s one way to solve the nagging problem with the Greek debt restructure triggering credit default swaps: just get the governing body to pretend the whole thing is voluntary.

There will be no payouts to investors holding bond insurance contracts on Greek debt, a committee of bankers and investors ruled Thursday.

The decision by a panel of the International Swaps and Derivatives Association keeps the country — and the euro region — clear so far of the stigma of a “credit event” that would trigger billions of dollars in payments under the insurance contracts known as credit default swaps.

But the ISDA panel cautioned that the country’s situation is “still evolving” and said that a future review may have a different conclusion.

The ruling does “not affect the right or ability of market participants to submit further questions” relating to Greece’s situation, the ISDA said in a statement. “ Nor is it an expression of the .?.?. view as to whether a Credit Event could occur at a later date.”

Barry Ritholtz makes the right conclusion: “Exactly how brain damaged, foolish and stupid must a trader be to ever buy one of these embarrassingly laughable instruments called derivatives?”

Here’s the situation. A bunch of investors borrowed money to Greece, and then in order to hedge themselves in case Greece didn’t fulfill their obligations, bought credit insurance. And then Greece didn’t fulfill their obligations. And now, the governing body for the credit insurance says, you’re out of luck on this side too.

In any other insurance business, that would be the end. Everyone who bought the insurance and got shafted would tell their colleagues about it. Those with insurance contracts would try to cancel them. And nobody would buy them again. Somehow, the International Swaps and Derivatives Association thinks they can get away with this and just move on.

Incidentally, the governing body of the derivatives market, the ISDA, is also not a governing body. And a default event could still be called. So as a derivatives buyer, you have almost nothing to rely on. According to Charles Forelle, the real question will come later:

Most analysts agree that Greece will need to actually use the collective-action clauses to force at least some creditors to do the exchange. Once that’s done, expect another question for the ISDA committee: Is that fact that Greece forced creditors to accept new bonds with worse terms than the old a credit event?

And you should expect a yes.

Maybe. But the ISDA, according to Ritholtz, is also conflicted, with a stake in the underlying debate. So I don’t know that we can assume that. At any rate, investors are looking at the possibility that they bought worthless credit insurance. Maybe the CDS market will go poof after all. And that would actually be a good thing that reduces risk to the overall system, while forcing prudence on investors. So maybe this incompetence is working out for the best.

Previous post

Live Blog: WikiLeaks Releases the Stratfor Emails (Day 5)

Next post

AZ Finds Private Prisons Don't Save Money, Are More Dangerous

David Dayen

David Dayen