Greek failure to pay official lenders could trigger CDS payments, say lawyers

By Marius Zaharia

Private holders of Greek default insurance could be in for a payout of over $750 million if Greece defaults on debt owed to the European Central Bank or other public-sector creditors, lawyers said.

Worries of a default have resurfaced as Athens is in a stand-off with its international lenders over its plans to end austerity measures agreed under its 240 billion euro bailout deals.

Greek credit default swaps (CDS) paid out more than a net $3 billion after privately-held debt was restructured in March 2012. Default worries are now focused on debt held by public institutions such as the International Monetary Fund, European Union and ECB.

Investors who hold the relatively small amount of Greek government debt that remains in private hands may still get a payout if they have used CDS to protect themselves - even if Athens defaults only on repayments to the public institutions.

Payouts are made when the International Swaps and Derivatives Association (ISDA), which administers the CDS payment process, declares a ?credit event.?

But with no precedent for sovereign default on publicly-held debt triggering CDS payments, many market participants have been uncertain whether their default insurance would pay out in such a scenario.

Lawyers specializing in derivatives say it would. ?It doesn't make any difference whether it's held by a governmental entity or not,? said Simon Firth, derivatives partner at law firm Linklaters.

?If there is a failure to pay in relation to any borrowings of ... Greece, and the failure to pay exceeds a million dollars or its equivalent in the local currency, once any grace period has expired, that's a credit event.?

However, a special provision introduced soon after the...