STOCK MARKET WATCH -- Monday, 23 January 2012

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29. Eurozone crisis live: Lagarde urges Europe to boost its rescue fund

http://www.guardian.co.uk/business/2012/jan/23/eurozone-debt-crisis-live-greek-deal-knife-edge

12.17pm Here's an interesting nugget of information -- the cost of insuring Greek debt against default has actually dropped in recent weeks.

As this graph shows, the price of a credit-default swap on a five-year Greek bond peaked in early December and has been falling since. CDS contracts pay out if a bond defaults, and are meant to provide insurance for bondholders.


Data: BGC Partners/Bloomberg

Greek CDSs have been driven to record highs in the last couple of years, as the country struggled to meet the targets set by the IMF in refurn for financial help.

So why are they now falling? Louise Cooper of BGC Partners (who kindly provided the graph) explains:

The CDS market is suggesting that a "voluntary" deal will be done, no "credit event" will occur, and CDS insurance will not be triggered.

The key question, of course, is 'what counts as a default?'. Any deal that satisfies Greece and its creditors will see tens of billions of debt wiped out. Fitch and S&P have said they will class Greece as being in "selective default" if an agreement is reached - crucially, that is different than being in "restrictive default" (which is reserved for situations where a bond issuer refaults on its payments without the permission of its creditors).

There's a good explainer about this in the Daily Telegraph, from last weekend.

Louise Cooper also points out that a Greek debt restructuring deal will have implications for other weaker European countries. If Athens can agree a haircut on its debt, what about Ireland and Portugal?

The restructuring of Greek debt means that all Eurozone bonds are no longer considered risk free, (other countries bonds could be restructured in a similar way) so borrowing costs, especially for periphery countries will remain high.