5 ms·

is Greece in default or "kind of default"? I don't see in other headlines news.

by antimora 15y ago

Caligula 15y ago
It mentions that they are sort of forcing bond holders to accept a lesser payment. That seems like a kind of default.
- narrator 15y ago
  Whether they defaulted or not is actually quite key. You see, all the CDS (Credit default swap) holders get to demand the full face value of the Greek debt they hold from the CDS seller if Greece has defaulted. The CDS writers are going to take a huge bath if this happens. This is what took down AIG, except in that case it was subprime MBS (Mortgage backed securities) CDSs that did it.
  - achompas 15y ago
    This is an excellent question--I'm also curious to see how CDSes are affected. Logic dictates the EU would structure this bailout so that, no, CDSes cannot be redeemed, lest we see a bunch of insurers go under as well.
    - marshray 15y ago
      You can bet there are a lot of people making phone calls right now trying to figure this out. My guess is that nobody knows at this point. If this so-called "selective default" does end up being "structured" such that markets are surprised when CDSs cannot actually be invoked, then that erosion of confidence in the system itself might end up fueling a cascade failure even worse than simple direct failure of some insurers.
      - mdda 15y ago
        If I were worried about this point (and a holder of a lot on CDS 'insured' bonds), I'd get a friend that was immune to 'arm twisting' to buy 1MM of a particular issue, and play extremely hardball with the ECB. Eventually, a payment would not occur, and there would be a solid 'Credit Event' to trigger all the CDS.
        marshray 15y ago
        NYT: "Holders of short-term obligations would be able to swap their notes for debt with longer maturities and backed by high-rated bonds. An organization that includes most major European banks said its members would accept the offer and expected 90 percent of all Greek bonds to be exchanged. [...] financial institutions that own Greek bonds would effectively contribute 54 billion euros through 2014, largely by accepting reduced interest payments, and will stretch their maturities to as long as 30 years." I don't understand. Are 90% of Greek bonds truly held by organizations susceptible to arm-twisting by the ECB to the tune of 54 gigaeuros? How long is that charity coalition going to hold together once they see others collecting on their CDS policies? My guess is that something more than 10% those Greek bonds are held by entities which, in reality, are for-profit corporations with shareholders that know how to do a little arm-twisting of their own.
        tomkarlo 15y ago
        If you're a huge national pension fund that holds both Greek debt AND, say, a lot more Spanish debt, it's in your interest to exchange (and prevent contagion) even if other holders are making out better by not exchanging. If everyone refuses to exchange, Greece defaults and you could see contagion that impacts the rest of your portfolio. Most major holders have probably already written down the value of any Greek bonds anyway.
        _delirium 15y ago
        I believe that's true of the large private banks also, which is part of why this group amounting to 90% is on board. It's in the rational self-interest of a bank like Deutsche Bank or Societe Generale to take a haircut on their Greek-debt portfolio if it keeps the rest of their EU bond portfolio from blowing up--- especially if they can get a deal like this one where the EU governments partially reimburse the haircut.
  - akronim 15y ago
    what constitutes default will be pretty clearly defined in the contract - which is more in terms of credit "events" rather than just default. See for example the ISDA definitions: http://credit-deriv.com/isdadefinitions.htm http://credit-deriv.com/isdadefinitions.htm
chalst 15y ago
There are several different degrees of default, and ratings agencies take into account the severity of possible or past defaults in assigning credit ratings. For instance, Standard & Poor's has the following distinction [1]: > An obligor rated 'SD' (selective default) or 'D' has failed to pay one or more of its financial obligations (rated or unrated) when it came due. A 'D' rating is assigned when Standard & Poor's believes that the default will be a general default and that the obligor will fail to pay all or substantially all of its obligations as they come due. An 'SD' rating is assigned when Standard & Poor's believes that the obligor has selectively defaulted on a specific issue or class of obligations, excluding those that qualify as regulatory capital, but it will continue to meet its payment obligations on other issues or classes of obligations in a timely manner. A selective default includes the completion of a distressed exchange offer, whereby one or more financial obligation is either repurchased for an amount of cash or replaced by other instruments having a total value that is less than par. According to this definition, Greece is SD, and S&P has rated this credit event so. Felix Salmon is very much a "default is default, even if it means making a coupon payment one day late" kind of person: he is not using weasel words here. [1]: http://www.standardandpoors.com/ratings/articles/en/us/?assetID=1245303711350 http://www.standardandpoors.com/ratings/articles/en/us/?asse...

is Greece in default or "kind of default"? I don't see in other headlines news.

Caligula 15y ago

It mentions that they are sort of forcing bond holders to accept a lesser payment. That seems like a kind of default.

narrator 15y ago
Whether they defaulted or not is actually quite key. You see, all the CDS (Credit default swap) holders get to demand the full face value of the Greek debt they hold from the CDS seller if Greece has defaulted. The CDS writers are going to take a huge bath if this happens. This is what took down AIG, except in that case it was subprime MBS (Mortgage backed securities) CDSs that did it.
- achompas 15y ago
  This is an excellent question--I'm also curious to see how CDSes are affected. Logic dictates the EU would structure this bailout so that, no, CDSes cannot be redeemed, lest we see a bunch of insurers go under as well.
  - marshray 15y ago
    You can bet there are a lot of people making phone calls right now trying to figure this out. My guess is that nobody knows at this point. If this so-called "selective default" does end up being "structured" such that markets are surprised when CDSs cannot actually be invoked, then that erosion of confidence in the system itself might end up fueling a cascade failure even worse than simple direct failure of some insurers.
    - mdda 15y ago
      If I were worried about this point (and a holder of a lot on CDS 'insured' bonds), I'd get a friend that was immune to 'arm twisting' to buy 1MM of a particular issue, and play extremely hardball with the ECB. Eventually, a payment would not occur, and there would be a solid 'Credit Event' to trigger all the CDS.
      - marshray 15y ago
        NYT: "Holders of short-term obligations would be able to swap their notes for debt with longer maturities and backed by high-rated bonds. An organization that includes most major European banks said its members would accept the offer and expected 90 percent of all Greek bonds to be exchanged. [...] financial institutions that own Greek bonds would effectively contribute 54 billion euros through 2014, largely by accepting reduced interest payments, and will stretch their maturities to as long as 30 years." I don't understand. Are 90% of Greek bonds truly held by organizations susceptible to arm-twisting by the ECB to the tune of 54 gigaeuros? How long is that charity coalition going to hold together once they see others collecting on their CDS policies? My guess is that something more than 10% those Greek bonds are held by entities which, in reality, are for-profit corporations with shareholders that know how to do a little arm-twisting of their own.
        tomkarlo 15y ago
        If you're a huge national pension fund that holds both Greek debt AND, say, a lot more Spanish debt, it's in your interest to exchange (and prevent contagion) even if other holders are making out better by not exchanging. If everyone refuses to exchange, Greece defaults and you could see contagion that impacts the rest of your portfolio. Most major holders have probably already written down the value of any Greek bonds anyway.
        _delirium 15y ago
        I believe that's true of the large private banks also, which is part of why this group amounting to 90% is on board. It's in the rational self-interest of a bank like Deutsche Bank or Societe Generale to take a haircut on their Greek-debt portfolio if it keeps the rest of their EU bond portfolio from blowing up--- especially if they can get a deal like this one where the EU governments partially reimburse the haircut.
- akronim 15y ago
  what constitutes default will be pretty clearly defined in the contract - which is more in terms of credit "events" rather than just default. See for example the ISDA definitions: http://credit-deriv.com/isdadefinitions.htm http://credit-deriv.com/isdadefinitions.htm

chalst 15y ago

There are several different degrees of default, and ratings agencies take into account the severity of possible or past defaults in assigning credit ratings. For instance, Standard & Poor's has the following distinction [1]: > An obligor rated 'SD' (selective default) or 'D' has failed to pay one or more of its financial obligations (rated or unrated) when it came due. A 'D' rating is assigned when Standard & Poor's believes that the default will be a general default and that the obligor will fail to pay all or substantially all of its obligations as they come due. An 'SD' rating is assigned when Standard & Poor's believes that the obligor has selectively defaulted on a specific issue or class of obligations, excluding those that qualify as regulatory capital, but it will continue to meet its payment obligations on other issues or classes of obligations in a timely manner. A selective default includes the completion of a distressed exchange offer, whereby one or more financial obligation is either repurchased for an amount of cash or replaced by other instruments having a total value that is less than par. According to this definition, Greece is SD, and S&P has rated this credit event so. Felix Salmon is very much a "default is default, even if it means making a coupon payment one day late" kind of person: he is not using weasel words here. [1]: http://www.standardandpoors.com/ratings/articles/en/us/?assetID=1245303711350 http://www.standardandpoors.com/ratings/articles/en/us/?asse...