Greece has not yet triggered payment on controversial bond insurance contracts but market participants still expect Athens' efforts to reduce its debt burden to prompt an eventual payout on credit default swaps.
The International Swaps and Derivatives Association decided on Thursday that Greece had not breached the terms of the insurance contracts by preparing to force losses on private bondholders while exempting official creditors.
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However, the story does not end there and holders of the net $3.25 billion in default insurance contracts must wait and see if the next steps in the largest-ever sovereign restructuring will lead to a payout.
"The situation in the Hellenic Republic is still evolving and today's EMEA (determinations committee) decisions do not affect the right or ability of market participants to submit further questions," ISDA said in a statement.
Market participants still expect a 'credit event' will be declared to trigger CDS payments in the coming weeks. They believe Greece will have to use recently-approved collective action clause (CAC) legislation that allows them to force unwilling bondholders to swap their Greek bonds for new ones worth much less.
"We always thought that ISDA would declare a credit event after the CACs are activated. That won't happen before March 9 when Greece will know the participation rate in the (bond swap) and will have the opportunity to trigger the CACs," said Nikolaos Panigirtzoglou, a strategist with JPMorgan.
"Until then we're not going to have a credit event - that's what the consensus is."
The ISDA determinations committee that rules on CDS, consisting of 10 CDS dealers and 5 others which are mainly hedge funds, was expected to be called into action again if Greece invokes the CACs once its bond swap closes on March 8.
The country, enduring a fifth year of recession, must shave 100 billion euros ($134 billion) off its towering debt pile in order to secure a bailout from international lenders that will stave off a disorderly default.
If it does not manage this voluntarily it is expected to activate the CAC clauses.
The credit default swap trigger expected to emerge from that restructuring has drawn political hostility because some see the financial instrument as a tool that speculators have used to derail government finances.
The resistance to triggering CDS contracts led former European Central Bank President Jean-Claude Trichet to declare last year that a 'credit event' was taboo.
But, as Greece's perilous financial situation and the need for radical steps to set the country on a sustainable path have emerged, much of that resistance has subsided.
In part, this has come from a clearer understanding of the financial implications of a trigger, which carry little systemic threat when compared to the tens of billion of euros of writedown banks have already taken on their Greek bonds.
Data from the Depository Trust & Clearing Corporation, a clearing and settlement company, shows a maximum payout of $3.25 billion could result from the CDS trigger.
The real amount of money changing hands was likely to be smaller because investors expect to get some money back from Greek bonds, and positions are already mostly collateralized.
Because the contracts are not traded at an exchange, there is little clarity over who has bought the insurance and who stands to foot the bill in the event of a payout.
Many in the market would now view a payout on CDS as a positive, confirming that default insurance is a valid hedge against the risk that a country cannot pay back its debts.
That could bolster fragile investor confidence, providing a precedent for payouts that would make investors more willing to hold bonds from higher-risk euro zone sovereign debtors.
"The risk premia that have been priced into the peripheral curves to compensate for the seemingly ineffectual nature of CDS would be priced out," said Richard McGuire, strategist at Rabobank.
"Demand for CDS insurance would increase commensurately as it would be seen to be a more effective form of insurance."
The euro zone sovereign CDS market is worth a total of $109 billion.
($1 = 0.7476 euros)