Investors to receive $2.5bn insurance payout over Greek default

Fri, Mar 16, 2012, 00:00

INVESTORS HOLDING insurance-like products as protection against a Greek default, the world’s biggest sovereign debt restructuring, will receive about $2.5 billion, according to market prices yesterday.

An auction of credit default swaps on Monday will use the price of the new Greek 30-year bond to settle payouts as part of the restructuring.

These bonds are trading at 23 cent on the euro. This means that buyers of CDS protection can expect a payout of 77 per cent of the net outstanding amount of Greek default swaps in the market, which stands at just above $3 billion (€2.3 billion). The payout will be about $2.5 billion.

Although the payout settlement process is expected to run smoothly in Monday’s auction, market participants fear that the relatively new sovereign credit default swaps market may have been undermined by the Greek default.

One senior CDS trader at a European bank said: “We think the Greek auction will provide a fair price for those who have protection, but it is unclear what will happen if other sovereigns default. That could deter institutions from using sovereign CDS in the future.”

One criticism of the Greek debt exchange, which saw investors agree to write off more than €100 billion in return for new Athens’ bonds worth 31.5 per cent of the original investment, was the failure to allow investors to use old Greek law bonds in the auction.

Although investors are likely to end up with similar payouts on new bonds that will be used for delivery, this had been far from certain until now.

Investors with old international law bonds, not forced to exchange their debt, may also benefit because these securities are trading at higher prices. This means that a creditor with the old bonds could sell these at the higher price and still receive the same CDS payout as those with new bonds.

However, many traders and investors praised the International Swaps Derivatives Association, the industry body, for its swiftness over setting up an auction to settle CDS contracts.

Ciaran O’Hagan, head of European rates strategy at Société Générale, said: “ISDA’s decisions will go some way to ensuring that sovereign CDS in Europe survive and prosper as an instrument of cover.” – (Copyright The Financial Times Limited 2012)

*The international Monetary Fund (IMF) has approved a €28 billion contribution to the second Greek bailout, writes ARTHUR BEESLEY.

The IMF manoeuvre completes the arrangements for the new rescue. With the size of the IMF loans confirmed, euro zone countries will provide €102 billion in loans to the bailout.

“Greece has made tremendous efforts to implement wide-ranging painful measures over the past two years, in the midst of a deep economic recession and a difficult social environment,” said IMF chief Christine Lagarde. “However, the challenges confronting Greece remain significant, with a large competitiveness gap, a high level of public debt, and an undercapitalised banking system.”