Wall Street Journal
January 13, 2012
Credit markets have a message for European officials wrangling with investors to cut Greece's debt: You will get a deal, but it may not be the one you want.
Trading in Greek bonds and credit-default swaps suggests that while investors are betting an agreement will be reached, some bondholders are unlikely to enter into it voluntarily. That could lead to a technical default under the arcane rules of the credit markets, an outcome that European officials have been working hard to prevent.
European officials have aimed for voluntary agreement in part because it allows Greece to avoid the stigma of officially defaulting on its debt. Such an agreement also would mean bondholders had no right to make any claims under credit-default swaps, which offer insurance-like protection for bondholders in the event of a default. Trading in these swaps, known as CDS, has been vilified by European officials who see them as the domain of unscrupulous hedge funds seeking to profit from the region's troubles.
Expectations that a default still is in the cards can be seen in rising prices on Greek CDS. The cost of insuring $10 million Greek bonds for five years has risen to $7 million from $6 million over the past six weeks, according to pricing service Markit.
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