The fact that Greece is not officially regarded as defaulting is ridiculous – and how anyone can say the 70% net debt “haircut” for the private sector is truly voluntary simply beggars belief.
But now that Standard and Poor’s has downgraded Greece’s credit to “selective default,” that part of the fig leaf has been stripped away – and the International Swaps and Derivatives Association (ISDA) must declare that a “credit event” has now happened in Greece if the organization is to maintain any shred of credibility.
A “credit event” will enable anybody who’s holding Greek debt to enact a credit default swap (CDS), a form of insurance that investors use to protect against default. For these insurances to pay out, there has to be a “credit event.”
When the Greek parliament decided unilaterally to change the terms of its bond agreements with investors, that was the “credit event,” and now the ISDA must act.
But if they do not declare a “credit event,” I’m at a loss to know whether anything other than an Argentinian or Russian default counts. Greece has defaulted, it is as simple as that.
CDS was a major contributor to the global financial crisis in 2008, but it won’t be financial Armageddon this time around – the Emergency Financial Stability Facility stands ready, the European Central Bank is pumping money into the banks, and the liability for payouts on CDS related to Greek bonds is a relatively manageable $3 billion.
Every bank has now worked out what its CDS losses or gains will be. It is no longer an unexploded bomb, but it does need to blow up.
I cannot imagine the ISDA won’t declare a credit event, and it will be the first time a European country has officially defaulted in decades. It’s time to get it over with.