4 ms·

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 technic

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.
tomelgin 15y ago
> 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 Yes, hedge funds (and everyone) are allowed to bet on this. If there's an issue here, the question is who is selling fire insurance policies (at non-exorbitant rates) when they know that arsonists are around? If it's European banks that know they'll be bailed out, that's a problem. In theory, all CDS trades are registered with DTCC since 2009, and my understanding is this works pretty well for contracts as standardized and liquid as Greece. See also the WSJ article linked by ristretto below. source: http://www.dtcc.com/news/press/releases/2009/cds_contract_values.php http://www.dtcc.com/news/press/releases/2009/cds_contract_va... data: http://www.dtcc.com/products/derivserv/data_table_i.php?tbid=5 http://www.dtcc.com/products/derivserv/data_table_i.php?tbid... (see 'Hellenic Republic') some analysis of data integrity: http://www.bis.org/publ/qtrpdf/r_qt0912y.htm http://www.bis.org/publ/qtrpdf/r_qt0912y.htm thanks to: http://www.zerohedge.com/article/debunking-some-myths-about-greek-cds-contagion-threat http://www.zerohedge.com/article/debunking-some-myths-about-...)

_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.

tomelgin 15y ago

> 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 Yes, hedge funds (and everyone) are allowed to bet on this. If there's an issue here, the question is who is selling fire insurance policies (at non-exorbitant rates) when they know that arsonists are around? If it's European banks that know they'll be bailed out, that's a problem. In theory, all CDS trades are registered with DTCC since 2009, and my understanding is this works pretty well for contracts as standardized and liquid as Greece. See also the WSJ article linked by ristretto below. source: http://www.dtcc.com/news/press/releases/2009/cds_contract_values.php http://www.dtcc.com/news/press/releases/2009/cds_contract_va... data: http://www.dtcc.com/products/derivserv/data_table_i.php?tbid=5 http://www.dtcc.com/products/derivserv/data_table_i.php?tbid... (see 'Hellenic Republic') some analysis of data integrity: http://www.bis.org/publ/qtrpdf/r_qt0912y.htm http://www.bis.org/publ/qtrpdf/r_qt0912y.htm thanks to: http://www.zerohedge.com/article/debunking-some-myths-about-greek-cds-contagion-threat http://www.zerohedge.com/article/debunking-some-myths-about-...)