Greek “voluntary” exchange likely to turn mandatory, says Barcap

Barclays Capital analysts say they see a reasonably high probability that Greece's "voluntary" debt exchange will need to be converted into a mandatory process in the near future, thus triggering credit default swaps on the sovereign reference entity. In the bank's European Credit Alpha report, published on Friday, it says that the key question about whether Greece will trigger its credit default swaps is the participation rate in the voluntary exchange, and the number of hold-outs. It points out that if the EU is willing to live with a significant number of hold-outs - investors refusing to participate in the offer - then it can accomplish the debt reduction exercise without triggering credit default swaps. But it suggests that a low participation rate will make it harder for Europe’s leaders to achieve their aims.

The report adds that even if the voluntary exchange is completed as planned, Greece's debt problems would be far from solved, and there would remain a significant risk of a credit event in future. Barclays Capital goes on to criticise the view that the current situation with Greece undermines the utility of sovereign credit default swaps as a hedging tool. "If a voluntary exchange is accomplished without a CDS trigger, ultimately this is acceptable because CDS is not supposed to trigger in the context of a voluntary debt exchange,' write the authors.