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Greek 'credit event' declared

March 9, 2012

A key derivatives group has declared that Greece's bond swap deal was a "credit event," which will trigger bond insurance payouts. Hours earlier, the Eurogroup had cleared 36 billion euros in bailout funds for Athens.

Houses made out of euro bank notes
Image: Fotolia/svort

The International Swaps and Derivatives Association (ISDA) announced late on Friday that Greece's bond swap deal had constituted a so-called "credit event." The decision was based on Athens' decision to apply collective action clauses to the bonds, forcing those who did not volunteer to participate to accept the trade of Greek bonds for new ones with lower value.

Greece had secured 85.8 percent participation in its bond swap deal late Thursday. In the deal, private investors in Greek bonds volunteered to swap those for new bonds with a 53.5 percent lower face value, lower interest rates and longer maturities. The deal had cut Greece's debt burden by 105 billion euros ($138 billion).

Those who did not volunteer were compelled through collective action clauses to participate in the swap. It was in response to this compulsion, that the ISDA declared the credit event.

The decision means that approximately 3.2 billion euros in credit default swaps, insurance on the bonds, wil be paid out, the ISDA estimated, with the precise figure to be determined in an auction on March 19.

Eurogroup funds cleared

After a teleconference with the finance ministers of the eurozone, the head of the Eurogroup Jean Claude-Juncker announced on Friday that they had cleared 35.7 billion euros in loans towards Greece's bailout fund.

"The Eurogroup considers that the necessary conditions are in place to launch the relevant national procedures required for the final approval of the euro area's contribution to the financing of the second Greek adjustment program," Juncker said in a statement.

Friday's decision had been reached after Greece's completion of the bond swap deal.

Greek reaction

Finance Minister Evangelos Venizelos had been jubilant in the aftermath of the bond swap, which had been a required condition by the European Union and IMF in return for Greece's second bailout since 2010.

"Today, after a very long time, is a very good day [for Greece] as well as for me personally," he told parliament.

"I hope everyone will realize, sooner or later, that this is the only way to keep the country on its feet and give it the second historic chance that it needs," Venizelos said.

IMF contribution

Juncker also called for the International Monetary Fund to participate in the second bailout on Friday, as it provided a third of the first 110-billion-euro package in May 2010.

"The Eurogroup looks forward to a significant contribution by the IMF to the financing of the new Greek programme," he said.

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IMF directors are slated to discuss the organization's level of participation in the 130-billion-euro fund on March 15.

The Eurogroup is expected to release funds to Greece next week. Some 14.5 billion euros of Greek bond repayments are due on March 20, which would be defaulted upon without help.

sjt/ncy (Reuters, dpa, AFP)