Posted on 03/09/2012 12:03:07 PM PST by blam
IT'S OFFICIAL: ISDA TRIGGERS GREEK CDS IN UNANIMOUS DECISION
Simone Foxman
March 9, 2012
It's for real this time.
The International Swaps and Derivatives Association determined today that Greece's bond swap has triggered a credit event.
That will lead to payouts of credit default swaps—essentially, securities contracts on holdings of Greek bonds—that investors purchased to hedge against the risk of holding Greek sovereign debt.
An auction related to outstanding CDS transactions will be held on March 19. The committee asks that any investor wanting to participate in the auction notify ISDA immediately.
Provocation of a credit event has been a contentious topic in Europe during the last few months. On one hand, sovereign CDS contracts are the only securities that allow investors to hedge and speculate directly against governments. Because the market is so opaque and because many financial institutions are on both sides of this trade, credit default swaps have compounded concerns about the contagion that would occur as a result of a financial shock.
While the market for Greek CDS is relatively small, some traders and officials had been fearful that a credit event was still not fully priced in, and could have some negative consequences.
On the other hand, attempts to subvert existing CDS contracts would have also compromised investors' faith in EU leaders' willingness to stick to market rules. Analysts had feared that this distrust for sovereign credit default swaps would have spread into the corporate CDS market, destroying a major industry with far-reaching consequences.
Here's the official statement (pdf):
---
EMEA DC Statement March 9, 2012
In light of today’s EMEA Determinations Committee (the EMEA DC) unanimous decision in respect of the potential Credit Event question relating to The Hellenic Republic (DC Issue 2012030901), the EMEA DC has agreed to publish the following
(snip)
(Excerpt) Read more at businessinsider.com ...
this was ‘created’
to hit Portugal.
Europe going down in flames?
So, I don’t want to sound like an idiot or anything, but is this good, or is it bad?
I think it's bad...
But, the knowledgeable FReepers will be here shortly to explain it to us all.
This is all Greek to me (pun intended)
Could you translate for me? I have a couple of engineering degrees, but I’m not well versed in banking enough to appreciate the significance of this event.
It’s about credit default swaps. They needed a credit event and got it for them to be used. And to quote from the article: “While the market for Greek CDS is relatively small, some traders and officials had been fearful that a credit event was still not fully priced in, and could have some negative consequences.
The part about this being preceded by drama is interesting. Follow the links in the article.
They really were between a rock and a hard place with this.
An amateur’s view:
It’s better than the alternative (in which the holders of Greek bonds did NOT agree to the pay-out at 50% value), but it’s still going to have negative consequences.
What happened yesterday was a negotiated default (more than 90% of the bond-holders agreed to the 50% “haircut” of the value of their bonds) rather than a triggered default. If the latter had occured, then the mechanisms of the credit default swaps (i.e., insurance against official default)would have gone into operation, and THAT would have caused a horrible cascading effect upon all investors.
In the case that happened, though, the default was negotiated and agreed upon by the creditors, and so the Credit Default Swaps were not triggered.
But even in this less-horrible situation, creditors must now re-adjust all of their balance sheets to account for 50% loss on Greek bonds.
I hope I explained this correctly and clearly!
Okay. Thanks.
I thought the more serious 'insurance paying' event had occurred.
Everyone is still pretending though.
According to the Telegraph, 83.5% approved, the CAC provisions were implemented, and the CDS’s have been triggered (as per the story). Because the CDS exposure is below $3.2 billion, it is expected that the consequences will not be significant to the banking system.
This entire exercise is a farce. Merkel and Sarkozy just want to get past the next round of elections. The EU and the Euro are in big trouble. The Greeks won’t comply with the austerity terms, and the Portugese and Spaniards are hard on the heels of Greeks. Moreover, the Irish must feel like chumps.
Meanwhile, we have Obamalini and the Ds preparing us for a civil war....
Actually, ISDA’s trigger means the credit default swaps did indeed get triggered, and it is certainly not “a horrible cascading effect upon all investors.” Rather, it means people have to make contractual payments to each other. There is no risk or reason for there to be some “horrible cascading effect” in what is a small portion of the financial markets (Greek sovereign CDS market is small).
MUCH appreciated!
Someone correct this if it is wrong but
Oh noze, the companies that sold all those “credit defaults” to protect the buyer against default (AIG?) - now have to pay up on some of them.
This is bad man really bad. It means some of the swappers got caught holding the bag when the music stopped.
CDS were only supposed to be funny money, not real insurance policies anyone would ever have to, like, redeem.
There’s only about a couple hundred... trillion ... of them floating around out there in the financial ether world.
Who has exposure and who is now wondering how to cover themselves when the other (PIIGS) creditors start lining up at the trough?
Yes! California too! (yes, I live in CA) The sooner all of the shenanigans get exposed, the better.
Don’t worry.
The Fed will simply print more money and lend it to AIG, maybe even at a negative interest rate.
Oopsie Daisy.
Hanlon’s Razor...”Never attribute to malice that which is adequately explained by stupidity.”
See ya at the “finish line”!
I don’t know enough to say. But I have a feeling Zero is using U.S. Tax dollars to prop up Socialist Greece. After all,
why should Greece be held accountable for their Socialist Policies (Like California)?. SAC
And Spain...
A credit event is a 50 cent way of saying ‘default’.
The way a Credit Default Swap (CDS) works is that a lender asks the debter to buy insurance to make him/her whole should they default on the loan.
That CDS traditionally was held by the lender, and was worthless if the debt was paid back. The insurer (AIG was a BIG writer of such insurance policies) would make money on the premiums collected on those policies.
If the debtor defaults on the loan, the insurer (AIG) would pay you the face value of the loan, and then would be the new holder of that loan (that’s the swap part).
What happened in Greece was a declaration that Greece has formally defaulted on their sovereign bond debt. Individuals made Greece a loan, and Greece can’t pay it back. That means that the writers of the CDS’s insuring those bonds against default now have to pay the face value of those bonds.
HOWEVER, what is unclear to me in all of this is whether there was some deal that was put in place to protect the AIG’s and others in the world dumb enough to insure those bonds.
Keep in mind, that Italy, Spain, and Portugal are sitting there with far more bond debt. Portugal is said to be the next pony off the cliff, since the confidence that some accommodation could be made to save BOTH Greece AND the Euro was not successfully accomplished.
Also unclear is whether Greece will be forced to reissure Drachmas for Euros, etc.
This is giant. They just declared Greece fiscally dead, for all intents and purposes.
But, the knowledgeable FReepers will be here shortly to explain it to us all.
Heh. While we wait, I'll just add that it's Europe. Of course, it's bad. The EU is doing exactly what was intended: end war. Now, they just destroy each other economically.
Thanks.
I don't know why there hasn't been a bigger reaction if it's so big, eh?
Really, gold reacted rather mildly. My guess is that it’ll be looking to settle in around $1750 for a while.
>> “But I have a feeling Zero is using U.S. Tax dollars to prop up Socialist Greece.” <<
.
When has he not?
Obama’s only hope for re-election is for Europe to hold steady through the elections, and the Fed is pumping bucks across the atlantic, and into the stock market as fast as their turbo powered printing presses will run.
Thanks.
Who has that kind of money to insure the debt of Greece?
Swiss Re, Lloyds, AIG, mostly. There are others.
Let’s call it ‘fiscal dissemblance’.
It’s not a ‘default’. It’s a ‘selective default’. No kidding, that’s what Moody’s is calling it.
France is going to lose $10B, Germany $12.5B, and there are still talking about a bailout.
Spain is in for billions too, and they are next.
Let’s call it ‘fiscal dissemblance’.
It’s not a ‘default’. It’s a ‘selective default’. No kidding, that’s what Moody’s is calling it.
France is going to lose $10B, Germany $12.5B, and there are still talking about a bailout.
Spain is in for billions too, and they are next.
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