No default seen in credit swaps by Greece’s failure to pay IMF

Analysts and traders see little chance that Greece’s failure to pay $1.7 billion to the International Monetary Fund will trigger payouts on credit-default swaps.

The derivatives insuring Greek sovereign debt won’t pay out under rules of a failure-to-pay credit event because the IMF loan is a bilateral agreement and doesn’t cause cross defaults on government bonds, according to Royal Bank of Scotland Group Plc and JPMorgan Chase & Co. The three major credit-rating companies have also said they won’t consider the missed payment a default.

Greece’s government said it won’t make the payment owed to the IMF today and it’s preparing to exit the protection of Europe’s bailout regime at midnight. Investors are more concerned that the country may leave the euro after a July 5 vote on whether to accept the demands of its creditors and that it will be unable to make bond payments due later that month.

“The IMF payment will be missed but it is not as urgent as people think as it does not trigger bankruptcy” said Louis Gargour, CIO of London based LNG Capital, an alternative investment management firm. “What’s more interesting is that the country does not have sufficient liquidity to make bilateral and external debt payments next month and that constitutes default and will trigger CDS contracts.”

- Advertisement -

ECB bonds

Greece needs to repay about 3.5 billion euros ($3.9 billion) of bonds held by the European Central Bank on July 20. It also owes 11.7 billion yen ($96 million) of notes on July 14 and about 71 million euros of bond interest on July 17. Greeks are scheduled to vote in a July 5 referendum on creditors’ proposals for unblocking aid that could decide the country’s future in the euro area.

While IMF Managing Director Christine Lagarde said on June 18 that she’d consider Greece in “default,” spokesman Gerry Rice said last week that the fund wouldn’t use the term in official communication and would instead refer to Greece being in “arrears.”

Greece has until about 6 p.m. Washington time to make the payment to the IMF, which was conceived during World War II to coordinate monetary policy and promote exchange-rate stability. It would be the first advanced economy to fall into arrears with the fund and the largest missed payment in the IMF’s history.

“The non-payment will not be considered a failure-to-pay credit event for the credit swaps because the IMF loan is bilateral and does not trigger cross-default to government bonds,” said Alberto Gallo, head of macro credit research at RBS in London.

2012 default

Nick Sawyer, a spokesman for the International Swaps & Derivatives Association in London, declined to comment on what a missed payment to the IMF would mean for credit-default swaps. Greece triggered payouts on contracts insuring about $3 billion when it restructured its debt in March 2012.

“The IMF loan is a bilateral agreement with Greece so late payment won’t mean a default under the CDS contract like we saw in 2012 but it will add to the growing political instability,” said Gildas Surry, a senior analyst at Axiom Alternative Investments in London. “It’s very difficult to predict whether the Greek government – and which government, if any – will be able to finalize a deal with creditors.”

Though trading of Greek credit-default swaps has essentially dried up, sovereign debt risk implied by the contracts has surged. The derivatives signal an 88 percent probability of default within five years, up from 71 percent on Friday, according to data compiled by CMA.

There were a total of 605 credit-default swap contracts covering a net $585 million of Greek debt outstanding as of June 19, Depository Trust & Clearing Corp. data show. That’s a fraction of the $6.2 billion Greece owes the IMF this year and $26 billion through 2030.

“There won’t be any cross-default on the debt,” said Gianluca Salford, a rates strategist at JPMorgan in London. “Credit-default swaps won’t be triggered. For that, markets are looking to deadlines next month.”

No posts to display