A threat of new financial crisis looms after the International Swaps and Derivatives Association classified the debt swap deal between the Greek Government and private sector lenders as a ‘credit event', triggering insurance payments running into billions of dollars.
The ISDA said a “credit event”, or a technical default, has occurred because the Greek Government activated the Collective Action Clause (CAC) in its bond contracts to force the participation of those bond-holders who have not signed up for the deal.
This would mean that insurance against bond losses called Credit Default Swaps (CDS) would have to be paid out.
European politicians and financial authorities are worried that payment of CDS could destabilise the financial institutions that sold them and could set off a chain reaction as happened in the aftermath of the collapse of the US investment bank Lehman Brothers in 2008.
Insurance giant American International Group had to be bailed out by the US Government after it could not meet the insurance payments for CDS on mortgage debts in the collapsed US property market.
“The coming weeks will show whether the European financial institutions will be caught up in an avalanche of insurance claims,” a banking expert said.