Investors hoping for billions of dollars in insurance compensation from an agreement to reduce the amount Greece owes its bondholders were left disappointed Thursday after a panel convened by a derivatives market organization turned down requests for a payout.
Heavily indebted Greece and its bondholders agreed on a debt swap last week that would reduce the face value of their holdings by 53.5 percent. Bondholders _ banks, insurance companies, and investment funds _ are offered new bonds that are worth less, have a longer time to be paid off and bear less interest. The debt reduction is one condition of Greece getting a second, euro130 billion ($174.76 billion) bailout from other eurozone countries and the International Monetary Fund.
The panel, which had been convened by the International Swaps and Derivatives Association, had been asked by investors to rule whether the bond swap agreement constituted a so-called "credit event". This would have meant that bondholders who hold credit-default swaps _ complex financial products that act as insurance against default _ would have been paid off.
The committee, meeting in New York and London, ruled that the Greek bond deal was still being carried out and did not yet constitute a credit event _ but that the question could come up again.
Finance industry representatives had accepted the debt swap deal because the alternative _ even higher losses if the heavily indebted country was forced into a non-negotiated default _ could have been much worse. Bondholders who agree to the deal also get sweeteners such as a payment up front and added interest payments if Greece's economy grows faster than expected. The swap is expected to take place March 12.
Greek and eurozone officials have been eager to bring the deal off as a voluntary exchange _ meaning that it does not trigger payouts on credit default swaps. Analysts say that since many swaps issues have hedged their risk, the net amount that would be paid out is estimated at about $3.2 billion.
Greece has passed into law _ but not yet used _ so-called collective action clauses that would force holdouts to take the deal.
The ISDA panel ruled on two questions: whether the bond swap agreement itself constituted a credit event that meant creditors' derivatives insurance should pay off. It was also asked to rule on an earlier bond swap carried out between Greece and the European Central Bank ahead of the creditor swap. The answer was that neither constitutes a credit event.
The ECB got new bonds that were not subject to the agreed writedown, sparing it any losses. The panel had been asked to rule whether private credit holders were less likely to see any money if the debt has trouble being repaid because the ECB was getting paid ahead of them.
There has been concern that if credit default swaps were given the go-ahead, financial markets would face further uncertainty and firms that had sold the swaps would incur heavy losses. However, analysts say that most swaps issuers appear to have hedged their risks, meaning the net payout would be relatively small.
The 15-member panel was unanimous, according to the ISDA.
The decision is likely to be welcomed by finance ministers from the eurozone, who are meeting on Thursday in Brussels to check on Greece's progress in implementing promised spending cuts and economic reforms.
Greece has a wide array of policies and cuts to implement before it can receive a first batch of money from a euro130 billion ($173 billion) bailout Athens needs to avoid bankruptcy.
So far, it looks like it's impressing its creditors.
Germany's finance minister, Wolfgang Schaeuble, said he was optimistic that his eurozone colleagues would release the money to Greece.
"From what I heard ahead of time, it looks as if Greece has made big progress," he said, referring to Athens' implementation of reforms and spending cuts. "Because of that I believe we will make a big step forward today."
Schaeuble's French counterpart Francois Baroin was equally optimistic over the disbursement.
"Everything that was asked was generally done," he said. "We are in favor of unblocking (the funds)."