French plan for Greek bailout not default: derivatives group

5th July 2011, Comments 0 comments

A French proposal to involve private creditor banks in a new Greek bailout would not amount to a debt default and so would not trigger derivatives contracts designed to protect against that eventuality, a leading market group said Tuesday.

The French proposals require private banks to rollover their loans to Greece, taking out much longer-dated bonds as debt obligations mature so as to give Athens more time to stabilise its wrecked public finances.

On Monday, however, credit ratings agency Standard and Poor's warned that the plan, by forcing creditors to vary the terms of their investment, constituted a 'credit event' and was tantamount to a default which would be rated as such.

If Greece was in default, it could set off a dangerous chain of events, including triggering insurance contracts designed to protect against loss.

The same thing happened in 2008 with the collapse of US investment giant Lehmans Brothers, which triggered a global financial and economic crisis.

On Tuesday, David Geen, the head of the Interational Swaps and Derivatives Association, said that on the basis of publicly available information about the French proposals, the ISDA would not term the plan a "credit event."

In that case, Credit Default Swaps taken out to cover creditor exposure to Greece would not be triggered.

In the Lehmans case, creditors invoked their CDS protection, setting off a chain reaction as their opposite numbers in the position scrambled desperately to raise funds to meet their obligations.

The ISDA acts as the clearing house for derivatives trade, netting out positions to allow the market to work most effectively.

Meanwhile in The Hague, the major Dutch banks have agreed to take part in a second Greek debt rescue plan, the finance minstry said.

"In principle, we have already discussed this with the Dutch banks and they are ready to take part in a European package (on Greece,)" Finance Minister Jan Kees de Jager told television station RTL Z.

The minister added that the Netherlands wanted to make sure that it would be involved on the same basis as other European banks, not doing more.

The European Union, European Central Bank and the International Monetary Fund bailed out Greece in May 2010 to the tune of 110 billion euros ($160 billion) but Athens now needs another rescue, estimated to be worth about the same amount.

© 2011 AFP

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