Expectations Are High That Greek Bond Swap Deal Will Succeed And A Credit Event Will Occur

Greece santorini

Photo: Wikimedia Commons

European markets have rallied today amid positive signs that the Greek bond swap deal will succeed.Analysts believe that Greece has sufficient investor participation to trigger collective action clauses (CACs) that would coerce 86 per cent of its total creditors into swapping their bonds for those of lower face value and longer maturities. They also believe that this will trigger a credit event.

This bond swap—which constitutes a selective default—is crucial for the implementation of Greece’s second bailout.

Estimates of participation so far today range from 60 per cent (Bloomberg) to as much as 79.8 per cent (bankingnews.gr via @Alea_). The official level of participation needs to top 66.67% in order for Greece to activate the CACs—essentially, bondholders would vote to impose the debt swap on any holdouts.

This approval rate is lower than the 75 per cent measure the Greek government previously professed to be the minimum participation required for it to go through with the deal at all.

Were Greece not to pursue the bond swap, it could compromise dispersion of €130 billion ($172 billion) in bailout funds it expects receive from the EU/ECB/IMF troika. In this scenario, Greece would hard default on €14.4 billion ($19 billion) of its debts after those securities expire on March 20.

Should Greece decide to activate the CACs, then most analysts think that a credit event will occur (in which credit default swaps—essentially, insurance contracts on bonds—will have to be paid out). There is some lingering debate over whether or not this will be a good thing.

Consensus has been that a credit event would risk some uncertainty but that the market for Greek CDS is small enough not to generate severe effects for the greater eurozone economy. What’s more, many experts have opined that the risks of a credit event have largely been priced in.

However, other analysts have speculated that the fallout of a credit event could be increased speculation against other vulnerable eurozone countries like Portugal.

We’ll hear more about the level of participation in the deal and the likelihood of a credit event over the next few hours, and perhaps even into tomorrow if the country stalls the release of participation results. Greece’s private creditors have until 3 PM EST today to agree to the bond swap online.

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