Investors who held insurance to protect them against Greece defaulting on its sovereign debt will receive $2.5 billion in payouts, effectively cancelling out any losses on their investments.
A failing economy forced Greece to restructure its sovereign debt earlier this month, resulting in losses for private creditors. However, those who bought the insurance-like credit default swap will now be paid because of the protection they hold. Credit default swap holders usually receive 100 cents on the dollar minus the recovery value assigned to the debt.
Greek investors were forced to write off more than 100 billion euros ($132 billion) of debt in return for new bonds worth 31.5 percent of their original investment, according to Bloomberg. Without insurance, investors would only receive compensation valued at about 22-23 cents in the forced bond exchange. But Monday’s auction fixed payouts at 78.5 cents for every dollar of credit-default swap protection sold.
The credit default swap only kicked in because the International Swaps and Derivatives Association, the regulatory body for the credit derivatives market, ruled that Greece had forced its creditors into a debt restructuring and declared it a “credit event.”
“It’s a tried and tested method,” Gavan Nolan of Markit, which ran the auction along with Creditex, told the Wall Street Journal. “There have been nearly a hundred auctions for corporate entities and they always worked pretty well. Protection buyers are supposed to end up square.”
The success of Monday’s credit default swaps auction was good news for other struggling economies and their investors. “Triggering CDS might have more positive than negative implications for European government bond markets,” Ioannis Sokos, a fixed-income strategist at BNP Paribas, told Bloomberg. “It’s a clear demonstration that there is a functioning hedging tool out there for holders of other peripheral bonds.”
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