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August 2011

Credit event

The Greek collateral grab – a credit event after all?

Newsletter: Europe Express

The last of Finland theoretical agreement get cash collateral from him in Greece’s bailout – well, maybe Finland change the case after all. This is after other lenders complained about special treatment.

(Some Darth Vader quote comes to mind …)

Although Finland still wants guarantees in some form. And let’s not forget that he managed to strike a deal with Greece in the first place. An agreement that received a sign of tacit approval of the July 21 agreement of the euro zone on the new rescue plan for Greece.

The fact that Finland still wants guarantees is important, as there are still Greek obligations under English law which could easily default if this guarantee counts as Greece guaranteeing “external indebtedness” on terms higher than these ratings. . We have noted the wording of the circular of a variable rate note of 450 million euros maturing in 2012 for this purpose. Moody’s is warning Greece facing a massive default on all of its payments if the collateral issue delays the bailout, but we increasingly believe there is an emerging case of default on these notes. It would take a holder of this obligation (no doubt more an army of lawyers) to settle this question of “external indebtedness” and advise Greece to start the ball rolling. This is unlikely to happen as the Eurozone takes its time to tear itself apart over the legitimacy or terms of this cash collateral.

But the fact that an agreement already also exists, as this might not simply be a Greek CDS credit event separate from a bond default. In fact, the terms of the credit event could have been in place as soon as the Finnish finance minister bragged about the guarantee deal last week.

Although this is not a type of credit event, many have come across it.

A standard CDS contract for a Western European sovereign contains only three credit events: default, restructuring, or moratorium.

Reader Yogi Bear initially pointed out to us that Greece is therefore likely not subject to a bond acceleration credit event. (Foreign law obligations require that payments be expedited in the event of default, suggesting that this credit event could apply.) Of course, it is not impossible that there are old or overdue contracts. measure containing this credit event – but in any case, you will have to wait for the bonds to default and speed up payments. Even eurozone leaders couldn’t be stupid enough to let Finnish politics trigger a Greek default after all the hard work it took to build a voluntary bond swap, one would think, so act to prevent a accelerating bonds at all costs.

Although they were stupid enough to let Finland go this far.

Next, the Obligation Default credit event is presented.

According to the definitions of Isda 2003 credit derivatives, an Obligation Default credit event is triggered when the bonds…

… Become liable to be declared due and payable before they would otherwise have been due and payable as a result of, or on the basis of, the occurrence of a default, event of default or other condition or similar event (however described), other than a failure to make any required payment, with respect to a reference entity under one or more obligations

(Default of Obligation and Obligation Accelerator cannot apply to the same CDS contract, in case you were wondering.)

It is a very interesting place of Yogi Bear.

It’s pretty broad as a definition. So broad that in fact, we believe this could be one of the reasons that credit default events are rarely found in modern CDS contracts. You would be a little nervous to sale such a contract. These events can be so rare that Isda’s Determination Committee for Credit Events doesn’t even list Obligation Default as a query option on its website (we assume it reports to “Other”):

But it could well be that such a contract is gathering dust in a shady corner of Mayfair or Connecticut. A contract on Greece.

As Yogi Bear notes, the key question is what it means to ‘become capable of’ in what is publicly known about Finland’s deal with Greece. However, whatever happens to the deal afterwards, the Finnish finance minister has declared an agreement on guarantees. Remember that the threshold for a credit event request is a publicly available source (two, technically). If you think there is no way that a simple ministerial statement could trigger a credit event, there is a strange echo in Argentina. We have already heard of official statements on the possibility restructuring that actually led to questions about credit events as the country defaulted in 2001.

This assumes that the breach of obligation dates from the initial declaration that Greece will guarantee the Finnish loan (part of the EFSF). As Yogi Bear points out, the terms of the FRN 2012 provide that in the event of default, Greece must default on its obligations …

… And continue to be in default for 30 days after written notice has been given to the Republic by the holder of any ticket

There are other obligations under foreign law where there must be 25 percent of the holders, although in this one it is any holder.

Thus, it could happen to a holder putting his head above the parapet to inform Greece. Likewise, a CDS holder could put his head above the parapet in order to question the Isda determination committee. You might not bother to do the latter if you expect Greece to experience a default or a restructuring credit event anyway in the near future (perhaps repayments or deliverables. under the contract are different, for example) and any contract containing a credit default event is likely to be rare, as we have noted.

But from this perspective, there does not appear to be an outright obstacle to the holders challenging this collateral agreement. In fact, we will be surprised if Greece and the eurozone avoid a challenge.

Information on the holders of the FRN 2012 is not easy to find, but a simple HDS search on Bloomberg showed that Eurobank EFG held around 32 million euros in several portfolios until at least the end of July. We will check other foreign law obligations as we go along (and if you yourself are the lucky owner of a probable suspect, do not hesitate to contact us …)

Oh, and we’ll check if other Greek bonds have cross-default clauses as well.

It could get messy.

(Massive hats off to Yogi Bear)

Related links:
Learn more about the foreclosure of Greek collateral – FT Alphaville
Moody’s dissatisfied with Greek collateral foreclosure – FT Alphaville
Greco-Finnish deal reopens bailout debate – FT


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