Greek restructuring might not trigger CDS, says JP Morgan

JP Morgan says that a Greek debt restructuring is most likely to be done in a way that does not trigger credit default swap contracts. In a research note published last week entitled “What are Greece’s options?”, the bank’s London-based credit strategists describe how a restructuring might look under a number of assumptions.

In this scenario, there is no forced haircut for debt holders and, instead, the Greek government’s debt burden would be reduced by a non-binding debt exchange – most likely swapping bonds for those with the same coupon but longer maturity. An exchange which swaps existing bonds for new debts with double the maturity would result in an average 7 point loss for investors in net present value terms. This would cut the present value of Greece’s liabilities by 15% to €122 billion.

The bank adds that credit default swap protection buyers would have little influence on any debt restructuring plan, and therefore could not push for it to be done in such a way as to trigger credit derivatives. JP Morgan estimates that only a very small proportion of outstanding Greek bonds is held basis packages. It says that DTCC data shows only $70 billion of gross credit default swaps notional outstanding and $8 billion of net positions.