Tuesday, March 13, 2012

Greek credit-default swap causes concern over other EU bonds

Fears over the credibility of debt papers in major troubled economies have begun to mount after the International Swaps and Derivatives Association (ISDA) acknowledged a credit event for Greece.

The ISDA has said it will pay back the holders of insurance on Greek bonds, or Credit Default Swaps (CDS), with part of that money allocated to the government. Now experts wonder which other indebted economies will follow suit.

The deal "raises the question of which country is next and which banks are most exposed," Hank Calenti, a bank analyst at Societe Generale in London, wrote.

Portuguese bonds have already started to be ringing the alarming bells, with the yields having recently increased significantly, agrees Yaroslav Lissovolik, chief economist at Deutsche Bank, Russia, talking to Kommersant daily.

International rating agencies also took the move negatively, with Fitch Rating taking more points off its Greek rating. Now it is down from C – a pre – default rating – to RD, or restricted default, as the agency classified the agreed swap as “distressed debt exchange.” Since there was a forced element in the deal, Fitch took it as a form of sovereign default. Moody’s also said on March 10 Greece had effectively defaulted on its debt obligations, saying the agreement with private creditors was “a swap in the wake of distress.” S&P downgraded Greece to “selective default” in late February 2012. Read More