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The International Swaps and Derivatives Association (ISDA) determined today that Greece’s bond swap has triggered a credit event, topping off eight months of angst since the first announcement that Greece experience the first developed market default in over 60 years.95.7 per cent of investors who hold Greek-law denominated Greek bonds will be forced to exchange them for bonds with 53.5 per cent.
However, the ISDA determined Friday that bondholders who purchased credit default swaps—insurance contracts on Greek bonds—will be able to get some of their money back.
Here are the latest statistics from the Bank for International Settlements on the total claims and exposures each country’s banking system has to Greece.
Foreign claims on all GIIPS economies declined. There was a $10 billion or 7.9 per cent decline in foreign claims on Greece which primarily involved its public sector.
The ECB--both national central banks and the actual ECB--owns just under €40 billion in Greek bond debt worth €50 billion, after buying Greek bonds in the open market for about a year. The bank will not take a haircut on holdings of Greek debt in the latest bailout, but EU leaders have made plans to channel any profits made from these bonds to supporting the other struggling countries and European firewalls.
However, analysts like Nouriel Roubini have argued that official sector creditors will probably have to bear the brunt of further restructuring efforts in Greece. A 50 per cent write-down on Greek debt could cause €35 billion in losses to the ECB. The ECB had also lent an additional €91 billion to Greek banks.
And while risks to the ECB itself are probably unfounded, it is financing massive amounts of European bank debt.
Banks borrowed a total of €1,018.5 billion ($1,0335.7 billion) from the ECB in two three-year LTROs conducted over the last few months.
Even so, Greece's private creditors are probably making out in a bond swap with the Greek government.
Economist Nouriel Roubini explained the reasons why Greece's private sector creditors shouldn't be too upset about the haircuts they are taking on Greek bonds (they'll be issued new ones with a lesser face value and longer maturities). We summarize his thinking:
- The plan will include €30 billion ($39 billion) for upfront cash sweeteners on the new bonds, a guarantee that they will still be valuable.
- New bonds will be issued under English law, not Greek law, so the Greek government won't be able to convert euro-denominated debt into new drachma debt if the country leaves the euro.
- Greece's official creditors have long been restructuring, extending maturities on loans to Greece and forgiving some of the interest they were owed, so they really shouldn't be considered 'preferred lenders.'
- Greece's public debts are unlikely to become sustainable anytime soon, and the country will probably have a hard time repaying the €130 billion ($171 billion) in additional loans it's about to receive from the EU/ECB/IMF troika.
The International Swaps and Derivatives Association decided Friday that Greece's debt restructuring had triggered a credit event, in which credit default swaps--insurance contracts banks hold to hedge against a Greek default--would be paid out.
So some financial institutions will recoup some of their losses on Greek bonds and others will have to pay out contracts they never thought they'd have to.
Morgan Stanley: The Greek crisis will make the EMU much more concerned about who they let into the Euro zone in the future. They will start to check more economic criteria, such as external imbalances and budget positions.
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