GREEK BONDS:HEDGE FUND managers are seeking legal advice about the worth of their credit default swap contracts amid plans for a voluntary exchange of Greek government bonds as part of the country's rescue plan, advisers say.
David Geen, general counsel for the International Swaps and Derivatives Association, declared last month that the proposed programme for a voluntary exchange of Greek debt would not trigger a credit event.
As a result hedge funds and other big holders of credit default swap contracts, which are often bought as insurance to guard against a bond default, are worried about doomsday prospects, according to industry advisers.
The prime concern is that debt holders – with credit default swap contracts to hand – who do not want to take part in a voluntary Greek debt exchange programme will receive only partial payment from the Greek government on the bonds they hold, but their swap contracts will not pay out to cover their losses.
“Any erosion in the efficacy of CDS on sovereigns could hurt hedge funds,” said Jim Vos, chief executive and head of research at Aksia, a hedge fund research group.
“Generally, the hedge fund industry is short credit via CDSs on sovereigns and higher-grade corporates against being long lower grade credit via bonds and loans.”
Any disruption to the way credit default swap contracts are supposed to function potentially raises concerns for regulators as well. – (Copyright The Financial Times Limited 2011)
