28/2/2012: The countdown to the March 8 deadline for Greece's private-sector creditors to agree to a debt restructuring begins Wednesday, when an international trade association decides to either accept or reject an application to determine whether the passage of laws in Greece that will force investors to accept a steep write-down on debt constitutes a "credit event" that will trigger the payout of insurance contracts against Greece defaulting on its debt, contracts known as credit default swaps, Dow Jones reported.
Only after the committee has opted to review the case would the committee then consider whether sellers of Greek CDS should pay buyers of the protection.
At stake are payouts from sellers of a net $3.2 billion of CDS on Greece currently outstanding, and the stigma associated with lending credence to an instrument policy makers have long reviled. The decision by the International Swaps and Derivatives Association is expected by 1700 GMT Wednesday.
THE BACKGROUND:
As part of a second bailout package for cash-strapped Greece worth EUR130 billion, investors will have to take a 53.5% loss on their principal and will swap their old Greek bonds with new bonds that have longer maturities and lower coupons. Greece faces a EUR14.4 billion bond redemption on March 20 and needed to tie up external assistance because it doesn't have enough funds to make the bond payments.
The deadline for banks to indicate their participation in the debt exchange is 2000 GMT on Thursday, March 8. Results are likely soon after the expiration deadline. An exchange of Greek bonds issued under foreign laws will take place later.
WHAT GREECE NEEDS:
Greece will complete the exchange of validly tendered designated securities if at least 90% of the aggregate principal amount currently outstanding of the overall debt has been validly tendered for exchange. If the participation rate is between 75% and 90%, Greece would consult with its European partners on whether to proceed with the deal. If its less than 75%, the exchange will be called off. That could derail the EUR130 billion bailout deal and Greece may be pitched into a disorderly default.
COLLECTIVE-ACTION CLAUSES:
Collective-action clauses, or CACs, are provisions entering Greek law that bind all bondholders to take part in a debt exchange if a predetermined majority approves of the exchange. CAC activation looks likely according to most market participants if the participation level at the debt exchange isn't strong enough. It could potentially take approvals from private investors holding only a third of Greek bonds outstanding for CACs to be invoked.
That works out to roughly EUR59 billion of the EUR177 billion of local-law Greek bonds that are in private hands. Foreign-law Greek bonds already contain CACs. Read more. (Subscription required.)
