US Government Debt Different - Finance Department - University of ...

74 A Market for End-of-the-World Insurance? Credit Default Swaps on US Government Debtnew debt instruments with lower face values, lower interest rates,and longer maturities. 9 The overall effect was to write down 74%of the value of the surrendered bonds. 10 To discourage holdouts, onFebruary 27, 2012, the Greek government had retroactively insertedcollective-action clauses into the outstanding bonds. These clausesprovided that a restructuring would be binding on all bondholdersif holders of at least 75% of the outstanding bonds agreed to theexchange. 11 On March 1, 2012, the International Swaps and DerivativesAssociation (ISDA)—a private trade organization authorizedto define terms used in standard CDS contracts—had announcedthat the insertion of the collective-action clauses did not constitutea “credit event” that triggered liability for protection sellers. 12 Thisannouncement fed concerns that a de facto sovereign debt defaultcould be structured in a manner that avoided CDS liability, renderingCDS on government debt effectively worthless.Such concerns were quickly allayed, however, when the Greek financeministry announced on March 8 that the completion of theworkout had caused the collective-action clauses to be triggered.Within 24 hours, ISDA declared that a credit event had at thatpoint occurred. 13 ISDA further announced that an auction wouldbe held on March 19 to determine how large a percentage payouteach protection buyer would receive. Concerns at that point shiftedto whether liability on Greek sovereign-debt CDS would be largeenough to threaten the solvency of the banks that served as the mainprotection sellers. This concern was greatest among observers whofocused on the outstanding contracts’ gross notional value, which atthe time of the restructuring was about $70 billion. 149 Michael Steininger, Biggest debt restructuring in history buys Greece only ‘a bit oftime’, Christian Science Monitor, March 9, 2012, available at http://www.csmonitor.com.10 Id.11 Kerin Hope et al., Greek bond swap deal on a knife-edge, Financial Times (March4, 2012, 9:06 PM), available at http://www.ft.com/home/us.12 News release, ISDA EMEA Determinations Committee, Credit Event Has NotOccurred with Respect to Recent Questions on The Hellenic Republic Restructuring(March 1, 2012).13 News Release, ISDA EMEA Determinations Committee, Credit Event HasOccurred with Respect to Recent Questions on The Hellenic Republic Restructuring,(March 9, 2012).14 Bloomberg View: Credit Default Swaps Work (See Greece); Eyes in the Sky vs. Privacy,Bloomberg Businessweek (March 15, 2012), available at http://www.businessweek.com.