World Politics News   Articles for World Politics Course

Apparently, 85% of the Greek bondholders have accepted the Greek offer of a reduction of about 70% of the value of the bonds.  The next step is for Greece to invoke what is know as a “collective action clause” which forces hold-out bondholders to accept the reduction in value.  If the clause is invoked, then the percentage of bondholders “accepting” the reduction will increase to about 95%.  The default, therefore will occur, but it will be an “orderly” default meaning that it not not necessarily trigger off a panic with respect to other countries in situations similar to Greece’s.

We will need to see if the ISDA will declare the default a “credit event.”  If it does, then the credit default swaps (the insurance policies against default) will be honored.  Such a determination will mean that some of the parties to the swaps will have to give up the collateral they had pledged as the “premium” for the insurance.  So some of the banks and hedge funds will lose some money.  How much money they lose depends upon how accurately they assessed the final value of the bonds after a default–a perfect assessment (30% + whatever value of the bonds Greece will offer as replacements for the defaulted bonds) would mean that the collateral would be worth exactly that amount.  We doubt that anyone predicted exactly the right value for the collateral, but it is possible that many of the issuers of the swaps could have come close.  The payout will be significantly less than the total amount of the defaulted bonds, but it may still be a hefty amount.

What is troubling is that the markets are now trying to figure out what the interest rates on the new Greek bonds (the ones that will be issued to pay the 30% of the old bonds that Greece has now defaulted upon).  Runors abound, and The Financial Times  says this:

“The new bonds that investors will receive on Monday have already started trading on the grey market and are quoted at yields of 17-22 per cent, a distressed level higher than any other country inside the eurozone.”

If accurate, the Greeks will very likely default again in the future.

Later in the day…….

The ISDA has in fact declared the default a “credit event” which means that the credit default swaps will be honored.  We will find out in a few days how much will be paid out.  At this time, I’m not sure if the counterparties to the swaps will be identified.  I’ll try to find out.