The Greek swap-opera


dfd1LONDON | Half an hour before the deadline passed at 20:00 GMT on Friday, the Greek minister for international economic relations Constantine Papadopoulos confidently told Sky News in London that default had been averted.

“The indications we have are that the debt swap seems to be going well. Greece will get the necessary bailout as we have now cleared the major hurdle and can look forward to a new beginning,” Papadopoulos explained, although he also acknowledged that “we are buying time in order to make changes that should have been made in the last 30 years.”

Greece’s government assured minutes afterwards that approximately 85pc of its creditors had accepted an accord to exchange their bond holdings to new securities, with private investors accepting a face-value loss of between 53.5pc of the initial sums of capital they had placed to up to a 75pc haircut.

That would mean that the country would effectively take more than €100bn off its public debt burden. The biggest restructuring in history, as described by Bloomberg, is today among us.

What next, now? There still hangs the question of convincing the rest of bondholders, many of which are hedge funds and have so far refused to share any measure of pain in the Greek state finances crumbling down to the floor. Greece’s government could force them to follow suit by activating special clausules but the International Swaps and Derivatives Association has ruled the swap will not be considered a default only if it is voluntary. Otherwise, the deal would in the end trigger the type of credit event that involves sellers of Credit Default Swaps on those Greek sovereign bonds to pay out to buyers of these products, who purchased them as a way of hedging risk.

If CDS were to step into the Greek scenario, billion of euros more would be charged to the total bill. Some analysts said this was the only recourse the government had to complete the deal. Here is a biased exposition of a biased CDS market:

“A special committee that governs credit-default swaps got together and said: the Greek bailout —a write down of 50 percent of the value of Greek debt— is voluntary and thus does not trigger the contractual terms of credit-default swaps. That means the companies that sold the CDSes will not have to cover the losses they had insured, that is, the decline in value of the Greek bonds. Who votes on this committee?  This will shock you: the very banks that issue, and often purchase, the CDSes at issue: Goldman, JPMorgan Chase, Citibank, UBS.

“No government entity at all. Just the same players who have an enormous interest in whether or not the CDS obligations are enforced.  And this special committee votes in secret, with no public accountability.”

Indeed, the CDS is blamed by some as an original sin of the financial markets at their murkiest and wildest:

“The Commodity Futures Modernization Act radically deregulated derivatives. The law changed the Commodity Exchange Act of 1936 (CEA) to exempt derivatives transactions from regulations as either futures (under the CEA) or securities under federal securities laws. Further, the CFMA specifically exempted Credit Defaults Swaps and other derivative products from regulation by any State Insurance Board or Regulators.

“This rule change exempting CDS from insurance oversight led to a very specific economic behavioral change: Companies that wrote insurance had to explicitly reserve for expected losses and eventual payout in a conservative manner. Companies that wrote Credit Defaults Swaps did not.”

Something to remember next time we hear that insurance on bonds of [write the name of a European Monetary Union country member] has spiked and the common currency is breathing with difficulty, close to its collapse

About the Author

Victor Jimenez
London contributor at, reporting about the City and the Eurozone economies. He regularly writes for Spanish newspaper group Prensa Ibérica--some of his features include shared work with journalists of The Daily Telegraph and the BBC.

Be the first to comment on "The Greek swap-opera"

Leave a comment