Tuesday, June 30, 2015

Missed IMF payment is not a default for Greece | But ECB bonds are a different story

So, Greece has missed its scheduled payment to the IMF, which should have been made before the close of business yesterday, and was not. The country is also now at the end of its bailout program which was arranged with other lenders, including the ECB.

However, according to Bloomberg, this missed payment is not an event that would trigger a pay-out on Credit Default Swaps (CDSs), as it is not tied in with sovereign bonds, and represents a bilateral agreement between the country and the IMF. The rating agencies, too, have let it be known that they will not be calling a default, at least not for the time being.

As far as the IMF is concerned, Greece is merely “in arrears”.

Credit Default Swaps are a kind of insurance against non-payment of credit instruments. They were the weapon of choice, for example, when John Paulson wanted to profit from his belief that institutions that securitised sub-prime mortgages would, at some stage, not be able to support their creations. CDS’s are normally used as a hedge by those with a direct interest in a payment, but they are available to anyone, including those who simply want to attempt to profit from a default.

So the story rumbles on. And on.

ECB bonds are a different story

There are three payments coming due by Greece to the ECB in July. The key dates are July 14th, 17th and 20th. These payments are directly related to bonds so the CDS argument will not be available to all concerned if one or more of these is missed.

In the meantime action will move to the political stage. The referendum that has been called for next Sunday in Greece appears to be still on, as of the time of writing. There seems to be a feeling that a majority of Greek citizens wishes to remain in the EU and the Euro, so a vote in this direction could have the effect of changing the political landscape in the Hellenic Republic once again.

And that could just be the catalyst for a resolution of this mess.

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