The Greek government used its nuclear option, retroactive CACs (Collective Action Clauses) to force compliance with their debt exchange proposal from those who were not willing participants. This move has resulted in an official (ISDA) determination that a “Credit Event” has occurred – in other words, a default, which will cause the Credit Default Swaps (CDS) to be exercised.

This means that the owner of a CDS is able to either present his defaulted paper to the writer of the CDS and receive an equivalent good bond in exchange, or sell his defaulted bond at an ISDA auction and receive cash compensation for the difference from face value.

Now we will see if anyone is swimming naked (NYT).

Edit: Apparently so. First naked swimmer:

Austria is facing a capital injection of as much as 1 billion euros ($1.3 billion) into KA Finanz AG two weeks after bailing out Oesterreichische Volksbanken AG. (VBPS)

The International Swaps & Derivatives Association today ruled that Greece’s use of collective action clauses forcing investors to take losses under the nation’s debt restructuring will trigger default insurance payouts.

In a statement today before ISDA’s decision, KA Finanz said it may have risk provisions of about 1 billion euros if credit- default swaps on Greece it has written are activated. That includes charges of 423.6 million euros on an assumed loss quota of 80 percent, it said.

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