Europe braces for hard options

European plans for a voluntary 50 per cent discount on Greek debt are unlikely to constitute a credit event, according to the body responsible for determining whether or not the move would trigger payouts under insurance contracts covering losses on Greek bonds.

The International Swaps and Derivatives Association said yesterday that the voluntary nature of the proposals meant the restructuring was unlikely to trigger payments under the credit default swaps contracts that investors use to insure themselves against potential losses on holdings of sovereign debt.

The final decision will rest with its determinations committee, which will consider the plans when they have been formally agreed between Greece, European authorities and the bond holders who would have to bear the losses.

The Institute of International Finance, which represents banks and other institutions that hold Greek debt, said it would work with the authorities to agree a final deal.

European leaders said the plans "should be agreed by the end of 2011 and the exchange of bonds should be implemented at the beginning of 2012."

Stock markets welcomed the announcements, with European equities rallying to their highest level in three months.

Marchel Alexandrovich, European financial economist at Jefferies, said the voluntary element was important in maintaining market confidence. Otherwise, panic would have spread to other eurozone economies, as investors speculated about which country would be next to unilaterally impose losses on bondholders.

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