Saturday, 25 February 2012

Has anyone seen a number as to just how much will be payable on CDS when
the Greeks default?
"Naked" CDS, i.e. CDS where the holder has no vested interest in a Greek
loan (pure gambling, in other words) are said to be a much larger amount
overall than the CDS actually 'insuring' lenders against default.
Including both, HUGE sums of money ought to move when the EU is finally
forced to officially admit to a Greek default. I believe that is the
real reason for all this 're-negotiation' silliness -- the ECB is
terrified that the house will fall down.
So does anyone know how much is (literally) at stake?
S.

A KEYWORD search on my own collection of articles revealed this:

"The impact of triggering CDS for those who hold protection against Greek sovereign debt default would reach far. Despite the relatively small volume of CDS held against Greek bonds (with gross exposure around $70 billion and net notional exposure below $5 billion), there would be a domino effect that could spread voraciously through the EU."

THIS ESTIMATE FOR AMERICA IS 100-FOLD GREATER BUT ISN'T RESTRICTED TO GREEK CDS!

"The CDS holdings of U.S. banks are almost three times as much as their $181 billion in direct lending to the five countries at the end of June, according to the most recent data available from BIS. Adding CDS raises the total risk to $767 billion, a 20 percent increase over six months, the data show. BIS doesn't report which firms sold how much, or to whom. A credit-default swap is a contract that requires one party to pay another for the face value of a bond if the issuer defaults."

CAVEAT EMPTOR

"Sovereign CDS market is an OTC market, meaning that there is not enough transparency. Consequently, we do not have access to quality facts, ie which part of the traded amounts is invested for hedging purposes and which part is on naked CDS"

A LIST OF the Greek debt holders (not CDS issuers), bank by bank

ISDA HAS DECREED that a voluntary default shouldn't be a CDS trigger but the debate continues.

"The head of the European Commission's economics team Mario Buti said Brussels is prepared to allow credit default swaps (CDS) on Greek bonds to come into play if talks fail to reach a deal that gives Greece enough debt relief to claw its way back to viability. "Triggering CDS may have to be considered," he said."



"Earlier this year, Deutsche Bank quietly decided to reduce its exposure to Italian government bonds. But it did not do that by simply selling debt; instead it achieved this partly by buying protection against sovereign default with credit derivatives contracts. That duly enabled the doughty German giant to report that its exposure to Italian sovereign bonds had dropped an impressive 88 per cent during the first half of the year – at least, when measured on a net basis – from €8bn to less than €1bn. So far, so sensible; or so it might seem. But there is a crucial catch. These days, it is becoming less clear whether those sovereign CDS contracts really offer effective "insurance" against default."

THERE IS ANOTHER TWIST: a collective action clause is now being introduced in the trade of Greek bonds which (if I understand correctly) means that voluntary restructuring is no longer possible, i.e. ISDA ruling that CDS not be triggered has been robbed of its legal foundation!? Has it?

As a first step towards completing the deal, the Greek parliament is set to pass legislation next week on so-called collective action clauses, with the aim of forcing a minority of 'holdout' investors to take losses of around 70 per cent on their holdings. "

If you look at this graph, you will see the CDS prices for Turkey, Germany, Ireland and the Club Med countries. Turkey is represented by the pink line, Germany by the black line. Initially, Turkey's debt was costing more to insure than the debt of any other country. But now, it is lower than any other Mediterranean country.

Posted by Britannia Radio at 07:08