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May 18, 2011 4:05 am
Default: This is where a creditor or investor, who has agreed to lend to a company or government by buying bonds, does not receive their money, according to the terms of the contract, such as the failure to meet interest payments.
Restructuring: This is viewed in the markets as the polite term for a default and means the same thing.
Hard restructuring: This is a forced default, which typically involves creditors or investors suffering losses.
Soft restructuring: This is where investors agree to change the terms of the bonds, usually through an extension of bond maturities. Although this a voluntary agreement, investors still regard this as a default.
Reprofiling: A new word that appears to have been coined by EU policy-makers, which means the same thing as a soft restructuring.
Liability management: A term used by companies, which typically means the extension of debt maturities and could be considered the same thing as soft restructuring or reprofiling.
Haircuts: Losses suffered by bond investors.
Principal: Initial amount lent by an investor, which is guaranteed to be returned once a bond matures. A bond investor should get their entire investment back at the end of the bond agreement or once the bond matures.
Coupons: These are the interest payments paid to investors for lending to a government, company or bank. A 5 per cent coupon will, therefore, pay an investor a 5 per cent annual interest payment.
Types of restructuring: Coupon interest payments to investors can be reduced; coupon payments can be delayed (grace periods); principal payments can be reduced (haircuts), principal payments can be delayed (maturity extensions).
Probability of a Greek default: Credit default swaps, which insure investors against default, are pricing in the chance of an Athens’ default at 66 per cent over the next five years, an increase from about 50 per cent at the end of February.
Market expectations over type of Greek default: Most investors expect Greece will see a voluntary restructuring, possibly as early as this year, followed by a forced restructuring in 2013.
Refinancing hump: Greece has a big majority of bond redemptions, or repayments – more than €100bn – between 2012 and 2015. This is a big hurdle for Athens, which most investors say means the International Monetary Fund and EU will need to extend the original three loans offered to Greece last May
European Financial Stability Facility (EFSF): The temporary EU rescue fund created in May last year.
European Stability Mechanism (ESM): The permanent EU rescue fund that will take over from the EFSF in July 2013. The terms of the ESM makes it clear that private investors must share the burden of future sovereign bond defaults
Biggest sovereign default: Argentina defaulted on $132bn of debt in December 2001. In 2005, it reached agreement to restructure around 75 per cent of this defaulted debt that imposed a 66 per cent haircut.
Adjustment: This is a word used by EU and IMF policy-makers when referring to the size of public spending cuts and tax increases Greece must introduce to bring its budget deficit down to 3 per cent of gross domestic product.
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