The International Swaps and Derivatives Association announced today that Greece’s debt restructuring will activate payouts on credit-default swaps. There had been speculation that the plan would not set off the swap payouts, a state of affairs that analysts said would reduce the effectiveness of the debt restructuring plan. Greece’s restructuring plan has started to be implemented in recent weeks. The Association said the swaps came into effect only today, Friday, after a move in passed by Greece’s Parliament to force losses on all of the country’s bondholders. The move was seen as key in securing the maximum possible effect of the default plan.
Swaps have been used by investors mainly to minimize their losses in the case of a default. Others had been using them as a payout that would fire if the Greek economy suffered a default. Both groups will be glad to hear the announcement of the payout commencement today. Investors are likely to require a similar instrument in order to be enticed into buying Greece’s new bonds which will be issued on Monday. The decision to enable the swaps has signalled European leaders were no longer worried about the swaps becoming a stress on the financial system. The swaps that remain outstanding have a value of $70 billion. The net figure to be paid, which combines swaps to be paid and swaps to pay stands at the lower figure of $3.2 billion. An auction will be held on older bonds which will decide the figure the swaps will pay out at. The price of buying these swaps has skyrocketed as media perception of Greek woes have increased since 2009. The Greek Government as well as European officials hope that this move will ease markets and start the Greek economy’s recovery.
Greece has been in dire economic straits in the past few years. The debt burdened country has had problems implementing its austerity packages and had to be bailed out twice by the troika, as it is referred to, of the IMF, the ECB and the EU. The debt restructuring plan is predicted to remove about $135 billion of its debt, hoping to ease it’s problems in the eyes of investors, not only for Greece but for the Euro Zone as a whole. Greece’s worries have hurt the entire region’s economic recovery and has dealt a serious blow to the viability of the single currency.