Finally, the ISDA (International Swaps & Derivatives Association) has decided today that a restructuring credit event has occurred in Greece.
Has there not already been restructuring of Greek debt?
It is true that there have already been write-offs by holders of Greek debt, however, a restructuring credit event occurs when restructuring is involuntary. Surprisingly the debt write-offs were previously considered to be “voluntary”, even though this required a lot of convincing of private creditors. Today though, the Greek government announced that it will activate its Collective Action Clause on Greek bonds.
What does the Collective Action Clause (CAC) mean?
The CAC is an agreement that if a certain percentage of Greek debt holders agree to a write-off, the remaining debt holders can also be forced into writing off their part of the debt. Since this clause has now been activated, the restructuring is no longer voluntary, and so a credit event has occurred.
So why should we be happy about a credit event having occurred?
The good thing about the restructuring finally being considered a credit event, is that any insurance that was purchased by private sector creditors and governments would now be triggered. Many holders of Greek debt had purchased Credit Default Swaps (CDS) in case Greece were to experience a credit event, and now that one has occurred, the CDS have finally been triggered and creditors receive their payments.
What if the restructuring had not been considered a credit event?
If a credit event had not occurred and CDS payments had not been triggered, many private creditors would have possibly begun to wonder as to whether there was any use for CDS at all. After all, if Greece’s debt restructuring isn’t considered a credit event, then what is? As a result, CDS agreements would have been deemed worthless, causing both private creditors and governments who hold CDS, to write off their value and possibly land in even greater financial trouble.
So there you go, there’s a part of Greece’s failure that we can finally be happy about.