For Greece, a critical conference call between London and New York

February 29, 2012

After months of riots, high-level summits and geopolitical drama, a part of Greece’s fate will be settled Thursday in an arena far from the public eye: a transAtlantic videoconference.

On the call, 15 bankers and hedge fund investors will convene to determine whether Greece has triggered a “credit event” — in essence, a violation of the bonds it has sold to investors.

It will be the first time that the obscure but influential International Swaps and Derivatives Association has made such an inquiry into a sovereign government’s actions, and the possibility that Greece could be found to have wronged its creditors is something European officials have worked for two years to avoid.

Such an outcome could leave the entire euro zone with the unwanted stigma of being a region where governments stiff the people who lend it money, and could trigger payouts under thousands of bond insurance contracts known as credit default swaps.

“We recognize the intense scrutiny” that will be directed toward Thursday’s meeting of an ISDA “Determinations Committee” charged with reviewing Greece’s situation, said ISDA spokesman Steven Kennedy. “But we think it is a very strong process” that the association has developed as part of a global effort to bring more transparency to the market for complex financial products.

An easing of Greece’s problems remains central to resolving the financial and economic tensions troubling the 17 nation euro currency region.

The country is in the midst of restructuring hundreds of billions of dollars in privately held bonds in an effort to reduce its debt load.

New international loans from the International Monetary Fund and other European countries remain on hold until that process is complete and Greek officials comply with a series of demands.

European leaders, meanwhile, will meet in Brussels beginning Thursday for yet another summit on the region’s economic woes.

For three years, committees within ISDA, a consortium of more than 800 global banks and financial firms, have been the arbiters who determine which credit events trigger credit default swap payments. The banks and other investors who buy and sell the swap contracts have agreed to the arrangement as a way to centralize what had been an ad hoc, company-to-company process of deciding whether a credit default swap payment was warranted.

The committees are set up with competing interests in mind. The group meeting in London and New York on Thursday includes representatives of major European institutions like Deutsche Bank, as well as private investment funds like Blue Mountain Capital, that might have different points of view.

A supermajority of 12 committee members is needed to make a determination either way, and if the panel deadlocks the issue would be sent to a new group of three outside arbiters. Some 59 cases have gone before ISDA committees so far without follow-up litigation, and only one has been referred to an outside panel.

“A lot of these things are fairly straightforward,” Kennedy said.

This one may not be. The issue posed to ISDA by an unidentified investor has nothing to do with missed bond payments or an actual default — the standard sorts of events that trigger a credit default swap payment.

Rather, the committee has been asked to decide whether Greece’s willingness to allow the European Central Bank to redeem its bonds at face value has, in effect, damaged other bondholders who face losses in excess of 50 percent under its debt restructuring plan.

Such “subordination” of one set of bondholders could, under certain conditions, trigger credit default swap payments.

The financial fallout from the ISDA ruling is not expected to be large.

Though more than 4,000 credit default contracts have exchanged hands over Greece’s bonds, much of the buying and selling cancels out each other as banks or other parties that insure a bond also buy their own protection against a possible default.

The net amount actually riding on the ISDA ruling is about $3.2 billion, according to data from the Depository Trust & Clearing Corporation, the central repository for CDS and similar financial contracts.

But the reputational damage remains uncertain. Analysts at agencies like Standard & Poor’s have begun boring into the possible implications if the euro zone becomes known as an area that sets aside the rights of private investors.

One European analyst, not authorized to speak for the record, said the “political implications” of the ISDA decision will be much more significant than the financial ones, as investors try to parse what the ECB’s bondholdings throughout Europe might mean for private investors who now appear to stand behind it in line for repayment.

The IMF has also flagged the issue as a potentially troubling one for Europe, perhaps damaging local bond markets for years to come.

If the group decides that no credit event has occurred in Greece, it may not be the last word. The bond restructuring may still conclude with some investors being forced to participate — an event likely to call the ISDA committee back into session.

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