Chillin' out till it needs to be funded
The ISDA decision is key to the Greek debt situation roll out from here as ISDA contracts enforce all derivatives and despite the flexi nature of OTC derivatives and their preponderence, most banks and now clearing house operations will not consider non ISDA cotracts. The ISDA teams have two issues at hand:
Firstly, whether a special class of investors was created on Eur 55 bln of exchange happening under a different governing law for the ECB without haircut. Even if the haircut issue is set aside, and one can afford oto do that for the Central bank, the fact that CACs do not apply to the new ECB debt, definitely means a reservation for ECB. Now the Determinations Committee has to consider , legallly, without consderation of emotional and financial chaos outside, if the Central Bank was always in a different class. – Hint: Subordination is a key event under ISDA rules too and ECB now is definitely owner of a senior tranche.. also not just ECB and the Central Banks have the EUR 55 bln kitty, the European investment Bank, another institution created by the Maastricht Treaty edition of the Euroclub, has access to the special terms without CACs and haircuts
Secondly, ISDA Determinations committee has to consider that its decision will be used as precedent by the private sector when Industry CDS are created as default events and their definition make or break the deals and the spreads in the CDS and for the market to be organised isda , thus deemed to own the contract actions thru the Determinations committee when required or otherwise, needs to be consistent for the industry to take off on the specified reforms for it.
However a credit event is unlikely to roil markets as only $3.5 bln in Greek CDS is outstanding and with 94% default probabiliity it does no tmatter i f it defaults, but the precedent is likely to be used in many corporate CDS where the payout and the default event if any would be evaluated around a lower 6% to 15% probability of default, Portugal as you remember was always treated as having defaulte4d per se with their Yields above 14% and Italy was expected to, technically when yields were at 8%