Greece default insurance pays out $2.5 billion

Greek Prime Minister Lucas Papademos says Greece should not need a second debt restructuring if the nation follows through on its reform program.

NEW YORK (CNNMoney) -- Investors holding insurance contracts on Greek government bonds will receive more than $2.5 billion in compensation after the country pulled off a complex debt restructuring. (see correction below)

The payout on so-called credit default swaps (CDS) was determined following an auction Monday that established the "recovery value" of Greek government bonds that were not swapped under the recent debt exchange.

CDS contracts are derivatives used as a form of insurance against a default. They can also be used to place bets on whether or not a government or company will repay its debts.

The recovery value of the bonds was set at 21.5%, which means holders of the contracts will receive compensation totaling 78.5% from CDS sellers. The market for Greek CDS contracts is valued at $3.2 billion.

Greek debt swap just one more step, not the solution

Earlier this month, Greece reached an agreement with private sector creditors to restructure €172 billion worth of Greek bonds, the largest restructuring of sovereign debt in history.

The restructuring, which involved a writedown and debt swap, was a condition for Greece to secure a second €130 billion multi-year bailout from the European Union and International Monetary Fund.

The deal covered 85.5% of the total €206 billion worth of Greek debt held by the private sector.

But the terms became binding for all holders of Greek bonds issued under Greek law after the government invoked clauses that had been retroactively added to the terms of the contracts.

As a result, the International Swaps and Derivatives Association ruled that a "credit event" had occurred, triggering the payouts on CDS contracts.

Meanwhile, Greek Prime Minister Lucas Papademos downplayed concerns that Greece may need further debt restructuring in the future.

In an interview with the Financial Times, Papademos said the full implementation of Greece's economic reform program should put the nation on the path toward a sustainable debt load.

"We will do whatever is needed to ensure that this was the last restructuring of Greek sovereign debt," he told the newspaper.

However, the outlook for Greece remains uncertain.

The Bank of Greece issued a report Monday that said Greek gross domestic product, the broadest measure of economic activity, will decline by 4.5% this year.

The Greek economy, which has been in recession for years, shrank 6.8% last year, according to government figures.

The central bank said in its report that Greece has a "historic responsibility" to take advantage of the restructuring and bailout program to turn its economy around.

The report noted that there is widespread "distrust" in the Greek government's ability to follow though on its reform program.

"This distrust is justified," the report said, adding that past efforts at reform had "come up against the illusion" that prosperity could be driven by running up deficits.

"There is no room for such illusions anymore," the central bank said. "The truly harsh and painful losses that Greek citizens have had to endure cannot be recouped by returning to the ways of the past."

Correction: An earlier version incorrectly stated the figure of CDS's in euros