4 ms·

As far as I can see in other reporting, it's something of the order of a 20% write down (at least for the German Banks) with the EU buying up some of the bonds

by frossie 15y ago

As far as I can see in other reporting, it's something of the order of a 20% write down (at least for the German Banks) with the EU buying up some of the bonds and the terms being extended to 15 and 30 years. In other words, it is not clear that how this is a default. In fact The Guardian says: German government sources said they had received assurances from the international ratings agencies that they would not rush to judgment in declaring a Greek default but would take their time in studying the deal. http://www.guardian.co.uk/business/2011/jul/22/bailed-out-eurozone-greece http://www.guardian.co.uk/business/2011/jul/22/bailed-out-eu... Which implies to me that "default" is in the eye of the beholder. Finance is not my kink, but my understanding is the nature of the "write down" is generally that as a bank you cannot borrow against the money that is owed to you, rather than actually giving up on collecting it entirely. In other words, the OP headline sees a bit dramatic.

latch 15y ago
The headline isn't dramatic. Credit rating agencies likely will consider this a default. The article explains it pretty plainly: But that won't stop the credit rating agencies giving Greece's bonds a default rating — this is a coercive deal, which clearly reduces the value of banks' Greek debt. (After all, just look at those haircuts.) A default is when you fail to fulfill your obligations. If I owe you $1.00, but instead pay you $0.80 (1 year late)...I didn't fulfill my obligation to you, and it's fair to consider me a credit risk. Or, put another way, people who declare personal bankruptcy don't do so because they can't pay _any_ of their debt, they do so because they can't pay _all_ of it.
- jeffreymcmanus 15y ago
  Debt rating describes a borrower's creditworthiness at a particular moment in time. Since Greece won't have access to the world credit markets for some time, their credit rating today is not material. What is at issue here is how quickly their credit rating recovers.
- vladd 15y ago
  But that's not what's happening at this moment. If you choose to do nothing, you still keep your $1.00 debt. Until now, Greece didn't miss a single payment. It's not making it mandatory to accept the 20% cut. It's not downgrading any promise for holders that choose to do nothing. Nor did it fail to pay its matured debt until now. It's just offering additional guarantees (which were not present in the initial debt agreement) at a specific cost (a 20% cut or a longer maturity date) for those that want to enter willingly into such transactions.
illumin8 15y ago
Right, the headline is a little dramatic. I think the ECB was extremely careful in the crafting of this deal to do everything possible to NOT trigger a technical default. A default is a delay or missing any coupon (interest) payments or failing to pay back a bond upon it's redemption date. The reason why it is so important that Greece not default is that a huge amount of hedge funds and other speculative investors have purchased CDS guaranteeing Greek bonds will not default. Because the CDS market is completely unregulated, we don't know how many billions or hundreds of billions in bets have been placed on a Greek default. In fact, even people that don't even own Greek bonds could purchase a CDS guaranteeing a payout if Greece defaults. In other words, if Greece does legally default by delaying any coupon payments or failing to pay any creditors, the ripples caused by all of the highly leveraged CDS could create another Lehman like scenario where large US and foreign banks don't have the capital reserves to cover all of the bets. The real crime in all of this is that the CDS market is still completely unregulated and the hedge funds are legally allowed to bet on this. The real world equivalent would be that you're allowed to take out a fire insurance policy on your neighbors house, and then proceed to smoke cigarettes and flick the lit butts at his house, hoping to spark a flame. The hedge funds do this every day by taking out CDS and then proceeding to short Greek bonds. If they can panic enough investors into running for the exits, they can trigger a default and become rich.
- _delirium 15y ago
  An interesting angle along those lines is: given the mostly unregulated nature of the CDS market, do they even all have the same conditions for "default"? Is it possible that some CDS contracts are worded more liberally than others?
  - mdda 15y ago
    Yes, though the ISDA docs have standardized most of it. But there are also a couple of major types of contract. (a) if there's a Credit Event, the protection seller pays 100 for the distressed debt (essentially taking a loss equal to however much the value of the debt fell). (b) if there's a Credit Event, the protection seller pays EUR40 (fixed payout, with a specific 60% recovery assumption). By playing on the mix of these CDS, people are probably already be playing on the post default value of Greek Debt, even before anything has formally happened. My guess is that process started over a year ago.

by frossie 15y ago

latch 15y ago

The headline isn't dramatic. Credit rating agencies likely will consider this a default. The article explains it pretty plainly: But that won't stop the credit rating agencies giving Greece's bonds a default rating — this is a coercive deal, which clearly reduces the value of banks' Greek debt. (After all, just look at those haircuts.) A default is when you fail to fulfill your obligations. If I owe you $1.00, but instead pay you $0.80 (1 year late)...I didn't fulfill my obligation to you, and it's fair to consider me a credit risk. Or, put another way, people who declare personal bankruptcy don't do so because they can't pay _any_ of their debt, they do so because they can't pay _all_ of it.

jeffreymcmanus 15y ago
Debt rating describes a borrower's creditworthiness at a particular moment in time. Since Greece won't have access to the world credit markets for some time, their credit rating today is not material. What is at issue here is how quickly their credit rating recovers.
vladd 15y ago
But that's not what's happening at this moment. If you choose to do nothing, you still keep your $1.00 debt. Until now, Greece didn't miss a single payment. It's not making it mandatory to accept the 20% cut. It's not downgrading any promise for holders that choose to do nothing. Nor did it fail to pay its matured debt until now. It's just offering additional guarantees (which were not present in the initial debt agreement) at a specific cost (a 20% cut or a longer maturity date) for those that want to enter willingly into such transactions.

illumin8 15y ago

Right, the headline is a little dramatic. I think the ECB was extremely careful in the crafting of this deal to do everything possible to NOT trigger a technical default. A default is a delay or missing any coupon (interest) payments or failing to pay back a bond upon it's redemption date. The reason why it is so important that Greece not default is that a huge amount of hedge funds and other speculative investors have purchased CDS guaranteeing Greek bonds will not default. Because the CDS market is completely unregulated, we don't know how many billions or hundreds of billions in bets have been placed on a Greek default. In fact, even people that don't even own Greek bonds could purchase a CDS guaranteeing a payout if Greece defaults. In other words, if Greece does legally default by delaying any coupon payments or failing to pay any creditors, the ripples caused by all of the highly leveraged CDS could create another Lehman like scenario where large US and foreign banks don't have the capital reserves to cover all of the bets. The real crime in all of this is that the CDS market is still completely unregulated and the hedge funds are legally allowed to bet on this. The real world equivalent would be that you're allowed to take out a fire insurance policy on your neighbors house, and then proceed to smoke cigarettes and flick the lit butts at his house, hoping to spark a flame. The hedge funds do this every day by taking out CDS and then proceeding to short Greek bonds. If they can panic enough investors into running for the exits, they can trigger a default and become rich.

_delirium 15y ago
An interesting angle along those lines is: given the mostly unregulated nature of the CDS market, do they even all have the same conditions for "default"? Is it possible that some CDS contracts are worded more liberally than others?
- mdda 15y ago
  Yes, though the ISDA docs have standardized most of it. But there are also a couple of major types of contract. (a) if there's a Credit Event, the protection seller pays 100 for the distressed debt (essentially taking a loss equal to however much the value of the debt fell). (b) if there's a Credit Event, the protection seller pays EUR40 (fixed payout, with a specific 60% recovery assumption). By playing on the mix of these CDS, people are probably already be playing on the post default value of Greek Debt, even before anything has formally happened. My guess is that process started over a year ago.