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Greece — so far — avoids one debt stigma

There will be no payouts to investors holding bond insurance contracts on Greek debt, a committee of bankers and investors ruled Thursday.

The decision by a panel of the International Swaps and Derivatives Association keeps the country — and the euro region — clear so far of the stigma of a “credit event” that would trigger billions of dollars in payments under the insurance contracts known as credit default swaps.

But the ISDA panel cautioned that the country’s situation is “still evolving” and said that a future review may have a different conclusion.

The ruling does “not affect the right or ability of market participants to submit further questions” relating to Greece’s situation, the ISDA said in a statement. “ Nor is it an expression of the . . . view as to whether a Credit Event could occur at a later date.”

ISDA, a group of more than 800 banks and financial firms around the world, judges the terms of credit default swap contracts, relying on 15-member committees of bankers and investors to determine whether payouts are warranted. Thursday’s decision was unanimous, ISDA reported.

The review of Greece’s situation could have important implications for the euro region — and the world market — for credit default contracts.

Greece is in the midst of restructuring its privately held bonds, which will involve losses of more than 50 percent for investors while reducing the country’s debts by more than $130 billion. The restructuring is part of a larger international rescue plan for the country, and to achieve the needed savings, Greece may have to force some bondholders to participate. The aim has been to keep the program voluntary — partly to avoid a negative ruling from ISDA.

If the credit default swaps are triggered, Greece itself would not have to make the payouts. The contracts are traded between banks and other private parties who buy and sell protection against a bond default.

But it would be a first-ever event in the euro zone and could raise concerns about losses in other countries.

There is a competing worry, as well. Credit default swaps are an important financial tool, allowing investors to protect themselves against corporate or sovereign defaults. Those who sell the contracts can profit from the premiums. The market for the contracts is in the trillions of dollars worldwide, but its stability depends on whether investors trust that the ISDA panels will trigger payouts when appropriate.

The Thursday decision addressed a narrow and technical question — whether aspects of the Greek restructuring deal have already damaged the interests of investors, even though the plan has not been completed.



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