“Voluntary Exchange” of Greek Debt? And There Goes Another Market

Credit default swaps are default insurance for corporate and sovereign bonds, to be paid in the event of the restructuring of the debt, a failure to pay coupons or principal on the bonds, or a bankruptcy.

The International Swaps and Derivatives Association's EMEA Determinations Committee voted yesterday that no “event” had occurred despite the Greek parliament’s passage of legislation that forces private creditors to accept losses on their holdings.

The Greeks and banks that sold credit default swaps had hoped to avoid triggering the credit default swaps by claiming that the swap of Greek bonds for “new” bonds at a loss of 53.5 percent was “voluntary.” The problem with this argument was that a number of private lenders were not willing to go along. Now the Greek parliament has legislated that they must.

So we now have a restructuring that is not a restructuring. We’ll have a default that is not a default. We now use semantics to solve inconvenient problems in new virtual universe of finance.

Greece’s long term problem is that lenders do not trust it to meet its obligations. I trust that memories are long. Such arbitrary action against private lenders and against holders of credit default swaps will only delay Greece’s return to credit markets.  Moreover, they cast a pall over sovereign debt, the cost of which  will be borne by borrowers generally.

Holders of credit default swaps join Chrysler’s secured lenders.