For all the ifs and buts about the latest euro rescue agreement, one of its most profound market legacies may be to sound the death knell for sovereign credit default swaps — at least those covering richer developed economies. In short, the agreement reached in Brussels last night outlined a haircut on Greek government bonds of some 50 percent as a way to keep the country’s debt mountain sustainable over time. But anyone who had bought default insurance on the debt in the form of CDS would not get compensated as long as the “restructuring” was voluntary, or so says a top lawyer for the International Swaps and Derivatives Association — the arbiter of CDS contracts.
ISDA general counsel David Geen said there would be no change in the ruling to account for the size of the haircut:
As far we can see it’s still a voluntary arrangement and therefore we are in the same position as we were with the 21 percent when that was agreed (in July)
Putting that in a bit more perspective, the International Monetary Fund’s Olivier Blanchard said in Dublin later on Thursday that the Greek deal could raise serious questions about the value of CDS as a hedging tool:
The general position is that if you are able to reduce the claims of creditors by a substantial amount without triggering a CDS event… that raises questions about the value of the CDS