>The unexpected breakdown in talks between Greece and its private-sector creditors has taken the country a step closer to bankruptcy after a failure to sign up lenders to a voluntary and “orderly” 50pc haircut to their holdings.
The clock is ticking for Greece, as a deal must be reached before March 20, when the country is due to receive a further €130bn (£107bn) bail-out tranche from the International Monetary Fund and must make a key €14.5bn bond payment.
The problem centres on the difference between lenders agreeing to a “voluntary” and orderly default – which would mean swapping into bonds with a lower value – and lenders refusing terms, which would cause a default.
This type of “credit event” would trigger billions of insurance claims through credit default swaps (CDS), insurance policies taken out to protect investors in the event of a default.
The problem is that, of the €315bn of Greek debt outstanding, only €7.8bn is covered by Greek CDS. The vast majority of Greek debt is held by European banks, which have little insurance on their exposure. Most Greek CDS are held by hedge fund managers – accused by Germany and France of financially benefiting from sovereign woes. Some claim that hedge fund managers would benefit from a default, with Europe’s banks being the losers.