ISDA Declares Credit Event in Greece

On Friday, the International Swaps and Derivatives Association declared that, under the terms of Greece's debt restructuring, the country had undergone a credit event. The market reacted little on the news, giving back only a few points. Friday morning it was revealed that Greece was unable to secure a participation rate great enough to get the debt fully swapped. In order to get the deal completed, Greece had to use collective action clauses. The execution of those clauses, inserted into the bonds retroactively, ultimately lead the ISDA to declare the move a credit event. Now, underwriters will be on the line to payout on Greek credit default swap contracts. European authorities had hoped to avoid this outcome, as it could put financial institutions on the hook for untold amounts. Still, the ISDA's hand was largely forced into declaring a credit event. If the ISDA failed to do so, it could have called into question the very purpose of buying CDS. At that point, investors holding CDS on other sovereigns (like Portugal and Italy) may have moved to dump their holdings, believing them to be worthless. Even though the market has held up in the face of this default, it may have secondary effects would could prove bearish. Some commentators have suggested that Portugal and Ireland may look to follow in Greece's footsteps. Also, as CDS are largely unregulated, it is unknown as to what extent financial institutions are on the hook to payout. That could lead to financials trading lower. Unfortunately, despite Greece's default, Europe's problems look to be far from over. Yet, perhaps markets can put aside these fears and continue to show strength.