Last Friday saw the culmination of efforts that had started their official trajectory in the last days of July of last year when it was made official that Greece would be allowed to write off part of its sovereign debt.
Controversial at the time was the insistence on private bondholder participation, a demand that many felt increased the volatility in the sovereign debt market for all the countries that were vulnerable — Italy, Portugal, Spain.
Beyond this, the insistence by the European Central Bank that this would not trigger a credit event, effectively a way of claiming that Greek had defaulted, would not be allowed to happen. The rationale was that this would impede the ability of the bank to legally provide Greece with funds.
Following negotiations between the “troika” of the European Commission, the ECB and the International Monetary Fund, as well as various representatives of the stakeholders of Greek sovereign debt, a harrowing back and forth which often teetered on the brink of ruin, a settlement was finally reached with 85.8 percent of the bondholder value.
Beyond that, two out of three foreign Greek creditors agreed to debt swap. The new debt has potentially a very long maturity rate, up to thirty years, and the minimum loss on the original bonds will probably be more than 50 percent.
The Greek government forced remaining bondholders into a Collective Action Clause which can retroactively force them to settle because the majority of creditors had agreed to the writeoffs and swaps.
After many months of waiting and the big credit rating agencies downgrading Greek debt to junk status, the International Swaps and Derivatives Association, the authority in determining if a credit event has taken place which would trigger credit default swaps, ruled that a credit event had indeed occurred here.
The outcome of this ruling seems to have been more optimistic than expected. The ISDA stated that the credit event was triggered specifically for Greece imposing its Credit Action Clause but the value of net CDSs this triggered is a relatively small sum, reaching $3.2 billion. This is less than 1 percent of the total bond value under consideration.
The ISDA also gave a clear ruling on what are the conditions for a credit event to take place. This may reduce uncertainty in the market and reassure CDS holders that their rights under contract are respected.
In the larger context of the European sovereign debt crisis, the swap as well as the second European Union bailout package coming into place and funds from the IMF being opened up, this could be the first good news in a very long time.
The Fitch agency even rated the new government bonds of Greece B-. Although weak by any standard, this is far from completely hopeless.
Also as a consequence of Frankfurt’s refinancing of European banks, the sovereign bond spreads for Greece and similar countries have gone down considerably, although recently the spread of Portugal went up.
Despite these relatively positive developments, the Greek people, suffering tough austerity measures, will continue to face reductions in pay, increased public-sector job losses and a deterioration in living standards on top of high unemployment and underemployment.
According to the analysis conducted by the troika, with the debt swap, Greece may reach a gross domestic product to debt ration of 116 percent by 2020 and 88 percent in 2030.
These numbers go under the assumption that the last year of recession for Greece will be 2014 after which it could slowly recover and grow annually by 2.5 percent.
Given the extremely fragile nature of the situation in Greece, this is probably not the last time European countries will need to provide funds however. As public opposition to bailouts also grows, loans would probably be tied to increasingly stringent reform demands — the very sort of reforms that Greece has so far struggled to implement convincingly.