Greece's debt: What happens if deal fails?
Greece has come back to the forefront of the markets鈥� agenda over concerns about its debt restructuring package, with fears that the troubled euro zone country may finally default on its debt repayments.
Yet many in the market believe that, even if the deal fails to achieve its goal of getting 90 percent of its bondholders on side (which looks increasingly likely), the effect on markets would be minimal.
听The possibility of a default on Greece's debt has hung over global stock markets for many months now.
鈥淓veryone knew it was going to default a year ago,鈥� Peter Toogood, head of investment at Old Broad Street Research, told CNBC Wednesday. 鈥�Portugal and Ireland will need another bailout too. These are evolving programs of austerity and bailouts.鈥�
听On Tuesday,听Greece听made it clear that it would not pay bondholders who refused take part in the debt swap program in an effort to sway those who are still undecided.
听Hedge funds听are believed to form a large part of the bondholders who are digging their heels in.
听If participation falls below 75 percent, the second bailout is likely to fail and Greece could default, leaving its creditors 鈥� including the 鈥渢roika鈥� of theInternational Monetary Fund,听European Central Bank, and the European Commission 鈥� with hefty losses on its debt.
If Athens cannot sign up the required 90 percent of bondholders needed to push through the debt haircut and bailout, it may have to use new legislation for Collective Action Clauses, or CACs.
In either of these scenarios,听credit default swaps, the insurance investors use to hedge against debt defaults, on Greek debt could be triggered 鈥� which may spark a feared market panic.
听鈥淭he triggering of CDS should not be a surprise. It鈥檚 a mark to reality and the right thing to do, and should be a positive aspect,鈥� Padhraic Garvey, head of developed markets rates and debt strategy at ING Wholesale Banking, told CNBC.
听There is already 鈥渁nger鈥� from fixed income managers that CDS haven鈥檛 been triggered yet, according to Toogood.
听鈥淚t鈥檚 incredible and there鈥檚 an awful lot of anger about it. If CDS are triggered, it means they鈥檙e worth something,鈥� he said.
听CDS听were last in the limelight at the start of the current financial crisis, when they were blamed for the collapse of investment bank Lehman Brothers.
听A trigger of CDS is already priced into the foreign-exchange market, according to Steven Saywell, European head of currency strategy at BNP Paribas.
He believes that there is potential for the euro to rebound on a successful deal.
听The sovereign bond market for Greece and other euro zone countries could also be affected.
听鈥淭hey鈥檙e a very small component of the market in sovereign bonds, so I don鈥檛 think it would have a huge impact,鈥� Saywell told CNBC. 鈥淗owever, the markets are not going to take anything for granted until this is actually signed.鈥�
听Fears of contagion spreading to other euro zone countries have colored the negotiations with Greece. Portugal and Ireland, which both took bailouts around the same time as Greece鈥檚 first bailout, are often reported to be next in the firing line.
听鈥淧ortugal and Ireland are two very different cases,鈥� Harvey said. 鈥淚reland has the confidence of the capital markets. Portugal is still speculative grade and that has led to capitulation selling.鈥�
听He added: 鈥淭he Greek deal doesn鈥檛 necessarily need to have specific ramifications on Ireland and Portugal. For Ireland, it鈥檚 more about the referendum and for Portugal more about getting the job done internally.鈥�
