Greece's deal with its lenders was last night declared a default by investors, effectively pouring scorn on politicians' figleaf claims to have averted such a dramatic event.
Greece drummed up enough support from its creditors to allow it to cancel a vast chunk of its debts and unlock a second €130bn (£109bn) rescue yesterday. But experts immediately warned the deal may not be enough to save the crisis-hit nation from yet another bailout.
Its deal with private investors – holding €206bn in Greek debt – sees the value of their bonds slashed 74 per cent in a bid to cut Greece's overall borrowing burden by a third to a more manageable 120 per cent of GDP by 2020.
The new bonds were last night already changing hands with massively high yields, reflecting expectations another default is a serious risk.
The Finance Minister, Evangelos Venizelos, hailed an "extremely successful" operation as Jean-Claude Juncker, president of the Eurogroup committee of finance ministers, said the deal "will make a significant contribution" to improve Greece's debt sustainability.
However, the International Swaps & Derivatives Association, which represents the derivatives industry, unanimously declared the deal was a default. The 14 per cent who did not accept the haircuts on their loans to the country will be forced to take them.
The ISDA's decision means default insurers – mostly banks – will now pay out a net $3bn on claims from lenders under policies known as credit default swaps (CDS). Clearly, some banks' CDS losses will be far bigger than others, depending on how well they managed to hedge their exposure.
While there will be some big individual losses to CDS underwriters from the ISDA decision, investors were relieved that it had been bold enough to speak the truth about the Greek deal. "Had ISDA gone along with the pretence that this wasn't a default, nobody would ever trust a CDS to pay out again," said one trader.
CDS critics claim they allow investors to profit from countries' financial misery. But they have also become a central tool for banks, insurance companies and others to hedge the risk of lending to countries. Without them, states such as Italy and Portugal would find it even harder to access crucial loans.
The so-called "troika" of the International Monetary Fund, European Central Bank and European Union has voiced fears the bailout could still collapse under the weight of the recession gripping Greece. More than one in five adults are jobless while youth unemployment has soared above 50 per cent amid the deeply unpopular austerity measures forced on the nation in return for the bailout funds.
In total, 85.8 per cent of investors holding debt governed by Greek law signed up to the deal, allowing Athens to force the remainder to take part by triggering so-called "collective action clauses".
The new Greek bonds were unofficially trading with yields of 15-21 per cent last night.