Everyone’s freaking out about a new report out from Fitch, which says that Greece would enter a state of default if investors took a 50% haircut bonds.
The press release has fed fears that Greece will see a credit event — which would result in payouts of credit default swaps — in the bond swap.
However, this is largely overblown.
Here’s what Fitch has to say:
The provisional agreement on private sector involvement (PSI) for Greece (‘CCC’) is a necessary step to put the Greek sovereign’s public finances on a more sustainable footing, notwithstanding that – if accepted – the 50% nominal haircut on the proposed bond exchange would be viewed by the agency as a default event under its Distressed Debt Exchange criteria.
However, talk of this “default event” is nothing new, and still does not imply that a bond swap will constitute a credit event.
That’s because only the International Swaps and Derivatives Association (ISDA) is responsible for determining when a sovereign or firm has witnessed a credit event.
In fact, the ISDA announced yesterday that, if a 50% haircut was truly voluntary, it would not constitute a credit event. However, it also wrote that it will not yet be able to make any definitive decision on the Greek bond swap issue until a plan was set in stone.
The ramifications of a credit event remain unclear, and debate continues over whether or not it would be a good or bad thing.
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