International bankers delay “chaos” decision over Novo Banco bond dump

It could “light the touch paper on chaos” and has thus seen international bankers delay their decision over the controversial Novo Banco bond dump for another four days.

ISDA, the international association of Swaps and Derivatives, has now met twice to determine whether or not the Bank of Portugal decision to consign five senior bonds retroactively into oblivion constituted a “credit event” (in simple language, a situation where an institution suddenly defaults on a ‘significant transaction’).

When it met last Friday, ISDA heard the opinion of three British legal experts, and has now deferred to “obtain more information on the financial situation of Novo Banco”.

According to Económico, this information is being analysed and should result in a decision by Friday.

As Bloomberg writer Mark Gilbert wrote in January, a credit event would “bring chaos for sure” as “in theory a legal clause called cross default kicks in – and more than 50 Novo Banco bonds worth almost €18 billion might be deemed to be in default”.

But Gilbert said it is the kind of chaos that “might bring the Portuguese central bank to its senses” and might even “persuade the authorities” to reverse the dump, which has prompted investors to pull out of Portuguese debt in droves and left scores of small investors ruined.

Thus we wait until Friday.

Intriguingly, two of the banks on ISDA’s committee overseeing this issue are giants that have already been ‘badly burned’ in dealings with Novo Banco: Goldman Sachs, which lost out to the tune of €800 million in the good bank/bad bank carve up proceeding the collapse of BES, and Pimco, which lost upwards of €228 million in the bond dump which its managing director likened to “the kind of populist expediency” more at home in Venezuela or Argentina.
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