FRANKFURT (MNI) – The European Central Bank’s decision to exclude
itself from collective action clauses on its Greek bond holdings will
not trigger a payment of credit default swaps, the International Swaps
and Derivatives Association said Thursday.

The trade body said its Determinations Committee had “unanimously”
decided that the Eurosystem’s Greek bond swap, prior to the retroactive
insertion by Greece of CACS in remaining Greek sovereign bonds, does not
constitute “subordination” of other creditors and therefore causes no
credit event.

The ECB last month swapped its Greek bonds for identical ones with
new dates, thus exempting itself from collective action clauses that the
Greek government retroactively inserted in its outstanding sovereign
securities. The action by the ECB means that, unlike private investors,
it would not be bound by the clauses should Athens choose to enforce
them in order to gain 100% acceptance of the pending private sector debt
swap proposal (PSI).

The association’s Determinations Committee also ruled that the
voluntary PSI agreement between Greece and its private bondholders,
expected to reduce Greece’s debt burden by E107 billion, does not
constitute a Restructuring Credit Event.

However, the Committee stressed that “the situation in the Hellenic
Republic is still evolving” and that future decisions that could trigger
credit default swaps cannot be excluded.

Credit default swaps may yet be triggered should Greece decide to
enforce collective action clauses on private investors in case there are
not sufficient voluntary participants in the current PSI offer, the
ISDA’s rules suggest.

International Institute of Finance (IIF) managing director Charles
Dallara, who negotiated the PSI on behalf of private investors, said he
does not expect that to be necessary since he is confident of strong
participation in the voluntary Greek debt deal.

However, a number of investors, particularly hedge funds, will not
be happy to agree to the punitive terms of the deal in which private
bondholders would take a loss of 53.5% on the face value of their Greek
bonds and, factoring in reduced coupon payments, a real loss of around
75%. Commerzbank head Martin Blessing recently said that the Greek PSI
“is as voluntary as the confessions to the Spanish Inquisition.”

The European Central Bank has previously stressed that policies
must avoid triggering credit default swaps, given fears that this could
encourage investors to bet on other European defaults and provoke
another eruption of the Eurozone debt crisis.

–Frankfurt newsroom, +49-69-720-142; jtreeck@marketnews.com

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