ISDA judges the terms of the bond insurance contracts known as credit default swaps. It means the banks or brokers that have offered that insurance on Greek bonds don’t have to pay out -- at least not yet.
With so much in flux in the country -- including an ongoing restructuring of its bonds -- ISDA said its decision Thursday does not mean a “credit event” won’t be declared in the future.
“The [review committee] noted, however, that the situation in the Hellenic Republic is still evolving and today’s...decisions do not affect the right or ability of market participants to submit further questions...relating to the Hellenic Republic nor is it an expression of the....view as to whether a Credit Event could occur at a later date, in each case, as further facts come to light,” the group said in a statement.
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 that determine which credit events trigger credit default swap payments. The banks and other investors that 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 that met in London and New York on Thursday includes representatives of major European institutions such as Deutsche Bank, as well as private investment funds including Blue Mountain Capital, that might have different points of view.
A supermajority of 12 committee members was needed to make a determination either way, and if the panel had deadlocked, the issue would have been 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.
The financial fallout from the ISDA ruling is not expected to be large.
Although more than 4,000 credit default contracts have exchanged hands over Greece’s bonds, much of the buying and selling cancels each other out as banks or other parties that insure a bond also buy their own protection against a possible default.
The net amount that was actually riding on the ISDA ruling is about $3.2 billion, according to data from the Depository Trust & Clearing Corporation, the central repository for credit default swaps and similar financial contracts.
One European analyst, not authorized to speak for the record, said the “political implications” of the ISDA decision would be much more significant than the financial ones, as investors try to parse what the European Central Bank’s bondholdings throughout Europe might mean for private investors who now appear to stand behind it in line for repayment.