Steering Greece's Debt Restructuring Through the CDS Quicksand

Abstract

A central policy concern since the onset of the Greek debt crisis in 2010 has been whether sovereign debt restructurings trigger credit default swaps (CDS). For the first time since AIG threatened to default on its CDS in 2008, the Greek debt crisis returned CDS to the global spotlight. The question of whether sovereign debt restructurings trigger CDS matters not only for buyers and sellers of CDS, but for financial stability more generally. While there was universal agreement that a failure to pay when due would trigger a failure to pay credit event under CDS, whether formally ‘voluntary’ restructurings also trigger a credit restructuring event was uncertain prior to the Greek debt restructuring in March 2012. With the benefit of the experience on the Greek restructuring February/March 2012, this article assesses how likely five types of restructuring, ranging from a simple bond exchange over the use of CACs to exit consent are to trigger CDS. The paper is structured into five parts. Part I outlines techniques for restructuring sovereign debt; Part II describes how CDS work and the challenges they raise in debt restructurings. Part III examines the most important credit event in the context of sovereign debt restructurings, the restructuring credit event. Part IV analyses whether five different types of sovereign debt restructurings techniques trigger CDS. Finally, Part V examines the central role of ISDA determinations committees.