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15 March 2012

Bloomberg: Greek bonds signal $2.6 billion payout on credit default swaps


Greek bonds issued as part of the biggest ever sovereign debt restructuring signal sellers of default insurance will have to pay about $2.6 billion to holders of credit swaps.

The credit-default swaps will be settled at an auction on March 19, after investors were forced to exchange their Greek debt holdings at a loss. Austria may have to inject €1 billion into KA Finanz AG, the so-called bad bank of Kommunalkredit Austria AG, to help cover Greek swap payouts, the nationalised lender said.

“People are using the longest-dated new bond as an indication of recovery”, said Teo Lasarte, a European credit strategist at Bank of America Merrill Lynch in London. “The important thing is that the payout will be reflective of the economic loss faced by most bondholders.”

In the exchange, investors agreed to write off more than €100 billion of debt in return for new Greek bonds worth 31.5 per cent of their original investment.

The settlement auction will determine the amount that sellers of protection pay by setting an agreed price for Greek bonds. Sellers pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. The International Swaps & Derivatives Association said it is expediting the auction to maximise the number of bonds that can be used to set payout amounts.

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