Pedestrians walk across Syntagma Square in Athens. Is Greece effectively in default? Photograph: Aris Messinis/AFP/Getty Images
Greece has not yet defaulted on its debt. That is what the International Swaps and Derivatives Association ruled at lunchtime on Thursday, when it announced that the deal to cut Greece's debt did not constitute a "credit event". The ISDA added that the situation is evolving and the debt swap could still be classified a credit event at a later date.
What is the ISDA?
Considering it governs a market worth a whopping $700tn - more than 10 times the size of the global economy - the International Swaps and Derivatives Association keeps a very low profile. Made up of banks, hedge funds, and investment houses, it governs the murky world of complex financial instruments that are traded directly between parties rather than on exchanges.
Why is it in the news?
A small part of this market is made up of credit default swaps (CDSs), a sort of insurance contract against a country or company defaulting. These have shot into the limelight as Greece teeters on default.
What's the ISDA's part in all this?
The ISDA gets to decide whether the deal to cut Greece's debt constitutes a "credit event" – effectively a default. If it does, that would lead to the payout of billions of dollars to the holders of Greek CDSs. So far, two CDS holders have put questions to the ISDA asking whether the deal represents a default. The ISDA held a conference call to discuss the questions and announced at lunchtime on Thursday that a credit event had not occurred. It noted that "the situation in the Hellenic Republic is still evolving" and market participants could submit more questions to the committee as more facts come to light.
Who holds Greek CDSs?
Intriguingly, a number of them will be sitting on the committee that gets to decide. But, so are the investors sat on the other side of the CDSs. The Wall Street Journal reports (££) that in September last year, three banks on the committee – Barclays, Deutsche Bank and BNP Paribas – had sold more Greek CDSs than they bought. If that is still the case, it means they would have to pay out if the CDSs were triggered.
What is likely to happen?
An industry veteran says: "I don't think anyone will be surprised if it was called a default." If holders of Greek debt all agreed to the debt swap, which sees their holdings cut in half, it wouldn't. But, Athens has included a Collective Action Clause in the deal, which would force creditors that did not want to swap the debt to do so. The ratings agency Standard & Poor's has already said it would consider this to be "selective default".
Could anything go wrong?
Quite a lot. After a default, a CDS auction is held to determine how much insurance should be paid out. This is based on the price of the cheapest Greek bond. So, if Greek debt was trading at 25 cents to the dollar, the CDS would pay out 75 cents to the dollar. However, the auction process can take up to a month, by which time there will be none of the original Greek debt left because of the bond swap.
"If all the bonds disappear once they're restructured, you've got nothing to deliver," says the industry veteran. "It'll be a bit messy." That may be something of an understatement. Others say this could be the end of the sovereign CDS market. If CDSs don't protect against default, there's very little point in holding them.