Greek Credit-Default Swaps Are Activated

Excerpt from an article in

The New York Times

Saturday, March 10, 2012

Greek Credit-Default Swaps Are Activated 

By PETER EAVIS

Greece's debt restructuring will prompt payouts on credit-default swaps tied to the country's government bonds.

The decision by the International Swaps and Derivatives Association ends months of speculation that a Greek default might not set off the swaps, a result that could have undermined their role as insurance against debt defaults.

"We saw today that the credit-default swap market worked," said the association's chief executive, Robert Pickel. "Market participants expected it to work."

Still, doubts about the instruments' effectiveness may linger. European officials initially shaped the Greek debt restructuring to avoid activating them. The concern is that future restructurings could be arranged to stop swaps from paying out.

"This is the right result, through a very circuitous path," said John Sprow, chief risk officer at Smith Breeden Associates, a fund management firm.

While Greece's debt exchange has been in the works for weeks, the restructuring activated the swaps only after the country made a legal move on Friday.

The Greek government chose to apply so-called collective action clauses, which it had earlier inserted into its bonds registered under Greek law. The deal maximized total debt relief for the country, but it also forced losses on bondholders - a credit event, and therefore a trigger, for the swaps.