Regular Lounge readers know that the Greece crisis has been a frequent topic for us – those posts are collected here. The news of the moment, however, relates to Greek CDS contracts and whether the recently proposed “voluntary rollover” will trigger the restructuring provision. That determination will be made by ISDA’s Credit Derivatives Determinations Committee, which consists of: 8 global dealer voting members, 2 regional dealer voting members for the relevant region, 5 global non-dealer voting members, and certain non-voting consultative dealer and non-dealer members. This Allen & Overy memo contains more detail on the five regional ISDA Determinations Committees. According to A & O, each Determinations Committee must reach at least 80 per cent consensus in order to pass the most important decisions.
And this is an important decision – though, not exactly, I think, for the reasons suggested in most press reports. More on that later.
For now, these articles in the FT, Greek Crisis Puts Future of CDS in Doubt, and the NY Times, Derivatives Cloud the Possible Fallout From a Greek Default, give some sense of the issues and what is at stake. The FT piece quotes Gary Jenkins, head of fixed income at Evolution Securities, who sums up the issue: “This is an incredibly important decision. If there is no credit event, it could destroy the sovereign CDS market as people might decide it is no longer worth buying protection.”
According to Financial News, France has advocated a simple rollover of Greek debt, where bondholders just receive payment for their bonds and buy new ones, which would not appear to trigger the CDS provisions, because it does not affect all bondholders. David Geen, ISDA general counsel says: “A rollover of Greek debt should not trigger an event if the money is repaid and reinvested. If it is not repaid, it could trigger a credit event as that would be a failure to pay.” Proposals to extend the bonds’ maturity could also trigger a credit event, as could Germany’s hair-cut plan, says Geen, depending on how it is executed.
Now, back to that earlier point. Many of the press reports don’t make much sense of the situation to me. They appear filled with inconsistencies and numbers that don’t fully add up. That could just be because they are unclear (though that is not normally the case with the FT). But I suspect it’s because there is more to this story than meets the eye.
Just a theory.
Which I will test out on you shortly.