4 ms·

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.
        marshray 15y ago
        OK, but what if you were using these Greek notes as collateral? Suddenly they're downgraded and you on the phone with your lenders. Are your lenders on board with this plan? They have reporting requirements too, it seems like you might be under an obligation to invoke your CDS policy if at all possible. After all, why would the world spend $B on CDSs and then not invoke them when it came down to it?
- 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

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.
        marshray 15y ago
        OK, but what if you were using these Greek notes as collateral? Suddenly they're downgraded and you on the phone with your lenders. Are your lenders on board with this plan? They have reporting requirements too, it seems like you might be under an obligation to invoke your CDS policy if at all possible. After all, why would the world spend $B on CDSs and then not invoke them when it came down to it?
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