Greek Swaps Headed Back to ISDA Committee

Shawcapfactoring - Holders of credit-default swaps on Greek bonds shouldn’t tear up their contracts after yesterday’s ruling against a payout.

The International Swaps & Derivatives Association said the swaps hadn’t been triggered by the European Central Bank’s exchange of Greek bonds for new securities exempt from losses taken by private investors. The group will now probably be asked to determine whether collective action clauses, or CACS, being used by Greece to impel investors to participate in a wider exchange of bonds that would trigger the swaps.

“They will have to enforce CACS,” said Alessandro Giansanti, a senior rates strategist at ING Groep NV in Amsterdam. “At that point the exchange will become coercive and that will be a restructuring event for CDS.”

The 130 billion-euro ($170 billion) bailout for Greece is testing the sanctity of the market for credit-default swaps and their effectiveness as a hedge against losses on government bonds. Policy makers including former ECB President Jean-Claude Trichet have opposed paying the contracts because they’re concerned that traders will be encouraged to bet against failing nations and worsen Europe’s debt crisis.

Contracts tied to the debt of Greece signal a 95 percent probability of default.

‘Crying Out’

Such thinking is misdirected, according to Nicholas Spiro, managing director of Spiro Sovereign Strategy in London. A settlement on Greek swaps may bolster confidence in the $258 billion sovereign insurance market and help boost the government bond market, he said. Efforts to circumvent a trigger risk undermining credit markets, Spiro said.

“The sovereign CDS market is crying out for an injection of confidence because we are by no means out of the woods,” Spiro said. “It’s very important, particularly in much larger bond markets like Italy and Spain, that investors’ hedges are perceived to be credible.”

European leaders agreed to provide capital faster for the planned permanent bailout fund in a concession to international pressure to strengthen the bloc’s defenses against the debt crisis. Euro governments might pay the first two annual installments into the 500 billion-euro fund this year and complete the capitalization in 2015, a year ahead of schedule. A decision will come later today.

Interest-Rate Swaps

Elsewhere in credit markets, Wells Fargo & Co. (WFC) sold $2.5 billion of debt at almost half the relative yield that JPMorgan Chase & Co. paid last month. The global speculative-grade default rate will rise to 2.8 percent by year-end from 1.8 percent at the close of 2011, Moody’s Investors Service said. The U.S. commercial paper market contracted to the lowest level in more than a year.

The two-year interest-rate swap spread, a measure of debt market stress, fell 0.4 basis point to 25.75 basis points. The gauge widens when investors seek the perceived safety of government securities and narrows when they favor assets such as corporate bonds.

The cost of protecting company debt from default in the U.S. declined, with the Markit CDX North America Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, decreasing 1.3 basis points to a mid-price of 92.7 basis points. The Markit iTraxx Europe Index of companies with investment-grade ratings rose 1.5 to 128.5, according to JPMorgan Chase & Co. at 10:30 a.m. in London.

Default Swaps Fall

The Markit iTraxx Australia index decreased 5 basis points to 137, Westpac Banking Corp. prices show. That’s on course for its lowest since Aug. 5, according to data provider CMA. The Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan declined 4 basis points to 157.

The indexes typically fall as investor confidence improves and rise as it deteriorates. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

While Moody’s is forecasting a faster default rate, the estimate is below the 4.8 percent average since 1983, the New York-based ratings firm said in a report yesterday. Standard & Poor’s is forecasting a default rate of 3.3 percent by year-end, from 1.98 percent at the close of 2011, the ratings firm also reported yesterday.

Wells Fargo

Bonds of Wells Fargo were the most actively traded U.S. corporate securities by dealers yesterday, with 175 trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Wells Fargo issued 3.5 percent, 10-year notes that pay 150 basis points more than similar-maturity Treasuries, according to data compiled by Bloomberg. On Jan. 13, JPMorgan sold $3 billion of 4.5 percent notes, also due in 10 years, at a 270 basis-point spread, before issuing an additional $250 million of the debt five days later.