French President Nicholas Sarkozy declared Friday that the long-running Greek debt "problem" had finally been "solved," following the successful implementation of a massive debt restructuring in the country. But while the restructuring was more successful than many had anticipated, even with the triggering of credit default swaps, Greece's debt woes, as well as those of the rest of the eurozone, are far from over. A longer-term and more robust solution will be needed before the "Mission Accomplished" banner can truly be rolled out on this long-running debt crisis.
The debt exchange that finally came to a head on Friday could serve as a template for future restructurings involving other peripheral eurozone members, like Portugal and Ireland. It was months in the making. Creditors, politicians, banks and bureaucrats from around the globe debated the issue ad nauseam until an agreement was put in place that would allow Greece to avert a humiliating hard debt default that would have jeopardized the stability of the euro.
The key decision was the one made to force Greece's private bondholders to take a major hit to help finance the nation's recovery. All-in-all, the private bondholders ended up receiving new bonds worth 73% less than what they had before, effectively wiping out 100 billion euros off the nation's burgeoning debt load. Greece received 130 billion euros ($170 billion) in fresh capital from the European Union and the International Monetary Fund to help fund their future debt payments, which will also serve to keep the lights on at the Acropolis.
Not everyone was on board, however. European authorities said that 95% of the Greek bondholders would need to agree to the debt swap, but only around 83% of Greece's creditors ended up voluntarily going along with the swap. To get to the 95%, Greece enacted collective action clauses, or CACs, which forced the errant bondholders to accept the decision of the majority and therefore agree to the swap.
Triggering the CACs helped secure the 130 billion euros for the Greek Treasury, but it also turned the debt swap from a voluntary exchange to a "credit event." Later on Friday, a council of banks and asset managers ruled that since Greece had enacted the CACs, it had officially defaulted on its debts, triggering credit default swaps that banks and hedge funds had acquired to protect themselves from such an event.
Winners and losers (and bigger losers)
Many investors believed that the triggering of CDS would cause total pandemonium in the markets, but, luckily, the notional value of the swaps outstanding against Greek debt amounted to just 3.5 billion euros, a small fraction of the total value of Greek debt outstanding.
CDS contracts are written by banks and passed amongst hedge funds, asset managers and other banks like hot potatoes, so it's tough to know exactly who is holding what at any given moment. But there is already some talk of winners and losers on the CDS front. The big loser at this point seems to be KA Finanz, the Austrian bank. It said on Friday that it could have a 1 billion euro exposure to Greek CDS. Meanwhile, data from the European Banking Authority suggests that UniCredit, the large Italian bank, could be on the hook for 240 million euros, while Deutsche Bank (DB) and BNP Paribas, might need to pay out 77 million and 74 million euros, respectively.
On the flip side, there are a few banks that could benefit from the CDS triggers as they bought protection in case of a default. HSBC, the British bank, may have racked up nearly 200 million euros, while RBS, another British bank, and minted 174 million euros. A number of hedge funds are expected to be big beneficiaries, but it is still unclear who the big winners are at this point.
