The Saker: We hear that the Ukraine will have to declare a default, but that it will probably be a “technical” default as opposed to an official one. Some say that the decision of the Rada to allow Iatseniuk to chose whom to pay is already such a “technical default”. Is there such thing as a “technical default” and, if yes, how would it be different in terms of consequences for the Ukraine for a “regular” default?
Michael Hudson: A default is a default. The attempted euphemism of “technical” default came up with regard to the Greek debt in 2012 at the G8 meetings. Geithner and Obama lobbied the IMF and ECB shamelessly to bail out Greece, simply so that it could pay bondholders, because U.S. banks had issued credit default insurance (CDS) against Greek bonds and were on the hook for a big loss if a default occurred. The ECB suggested euphemizing default as a “voluntary renegotiation,” asking banks and other bondholders to agree to write down the debt.
But according to the international bondholders’ organization – the International Swaps and Derivatives Association (ISDA) – credit defaults can be triggered if a debt restructuring is agreed between “a governmental authority and a sufficient number of holders of such obligation to bind all holders,” making it mandatory. According to the ISDA’s definitions: “The listed events are: reduction in the rate of interest or amount of principal payable (which would include a ‘haircut’); deferral of payment of interest or principal (which would include an extension of maturity of an outstanding obligation); subordination of the obligation; and change in the currency of payment to a currency that is not legal tender in a G7 country or a AAA-rated OECD country.”
That sounds pretty clear. Getting the ISDA to classify the bond swap as a “credit event” enables holdouts to collect default insurance from their counterparties. There is little such insurance here, but bondholders can then move to seize government property abroad. This is what Paul Singer’s vulture fund has done with Argentina, writing new international law that will apply to Ukraine.