FedUpUSA

Archive for the ‘Sovereign CDS’ Category

A default by any other name is still a default. When Greece defaults, the  inter-connected chains of credit default swaps will fall like dominoes.

For your Superbowl half-time reading, here is a brief summary of the situation in Europe:

1. Greece is poised to default, the end-game everyone anticipated in 2011. It is not a matter of if but when.

2. That default will trigger credit-default swap contracts, derivatives known as CDS that protect the owner from events such as default.

3. This will implode the shadow-banking system and the visible banking system, as those who sold the CDS (financial institutions) do not have enough cash or assets to pay the owners of the CDS.

4. The general idea is that sovereign default is very unlikely, so you can sell protection (CDS) against that possibility for a low premium, and cover that bet by buying your own protection from another player.

5. If that player (counterparty) can’t pay you off, then you can’t meet your obligations on the CDS you originated and sold.

6. So the failure of one counterparty can trigger a systemic failure akin to a row of dominoes being toppled by the fall of one domino.

7. To avoid such a CDS-triggered collapse, the European Union and its proxy agencies (European Central Bank, etc.) are attempting to call a default by Greece something other than “default.”

8. This will theoretically keep the first domino–a credit-default swap–from falling.  In other words, if we call a default by some other name, then it isn’t a default.

9.  Those absorbing the losses caused by a Greek default (and let’s stipulate that this references owners of Greek debt who bought CDS as insurance, not speculators who leveraged CDS at 30X the actual bond value) will want to cash in their insurance, i.e.  the CDS they own against a Greek default. They have every incentive to demand a default be  recognized as a default. If they accept the official plan to avoid calling a default a default, then all the losses will be theirs and none will fall to the counterparties who sold them  the CDS.

10. How is this fair?

11. The official response of avoiding default is focused on self-preservation, not fairness, justice or the rule of law.

12. The system can be likened to a pool of $100 bets leveraged off $5 in cash. If every bet is covered perfectly, then it’s somewhat like $95 in bets being paid by passing $5 around–much like the famous email that depicts all debts in a small town being paid by the same $5.

13. In the real world, somebody’s bets and insurance will not be perfect and their obligations will exceed their cash on hand. In other words, they will end up with $3 and owe $5. They will default and the dominoes will start falling as everyone down the line doesn’t receive their $5 counterparty payoff.

14. Empires tend to fall when the interests of their Elites diverge.  We are at such a point in the global financial Empire.

15. “Extend and pretend” has “worked” for almost 2 years. If Greece defaults and it is recognized by even one player as a default, then the system will quickly unravel and cash/dollars will be king until the deleveraging runs its course.

Charles Hugh Smith – Of Two Minds

Amazing….

BERLIN—Germany is considering dropping its push for an early rescheduling of Greek bonds in order to facilitate a new package of aid loans for Greece, according to people familiar with the matter.

Berlin’s concession that it must lend Greece more money, even without burden-sharing by bondholders in the short term, would help Europe overcome its impasse over Greece’s funding needs before the indebted country runs out of cash in mid-July.

What this really means is that Merkel has been apprised of the fact that her banks over there have written too many swaps and are too highly leveraged to survive a Greek default without yet another round of taxpayer funds from the Germans.  She is therefore willing to risk political suicide (which is almost-certain) in order to avoid having to admit that the game-playing has continued post the original Greek crisis, and that in fact there has been no de-leveraging or cleanup of the German (and French, incidentally) balance sheets at all.

In fact, what I suspect is that these banks over in the Eurozone have been buying up these Greek bonds at a nice discount and then tendering them to the ECB on a Repo basis for cash at full par value.  This of course is manifestly unsound but it’s what happens when nobody can see inside the “magic box.”  The problem comes if Greece suddenly decides not to pay, at which point the Repo transaction becomes uncovered and the ECB is screwed.

Euro-zone governments have ruled out lending to Greece without IMF participation. Greece will face a payment crisis in July unless it receives €12 billion of credits on June 29 from the IMF and Europe, euro-zone officials say.

I’ll lay even odds that Greece doesn’t have until June 29th.

Meanwhile Bloomberg says:

“There’s a degree of confidence that cooler heads will prevail and the next round of assistance will be forthcoming”for Greece, said Robert Rennie, chief currency strategist in Sydney at Westpac Banking Corp.

Cooler heads?  What’s “cool-headed” about giving an entity that has proved it cannot balance its budget more and more money on loan? 

Oh yeah, I get it – we can’t possibly let the truth out.  You know, the ugly truth: Greece is insolvent and so are a significant number of banks that lent it money while being levered up 30:1.

Yes, still levered 30:1.  You are over there in Europe, aren’t you?

Why I bet you are.

Of course there’s also a public charge of Treason that has now been leveled against the Greek Prime Minister too….

The gist of the allegations rest on the charge by Mr. Kammenos, that the Greek Prime Minister, Mr. George Papandreou and members of his team, presided over the sale of 1.3 billion dollars worth of credit default swap contracts (CDS on Greek sovereign debt) on or around December of 2009, shortly after coming to power. The 1.3 billion dollars worth of insurance protecting against a Greek default was bought during the spring and summer of the same year, by the Hellenic Postbank, a public banking arm of the Greek government.

Oh that’s very nice.  Isn’t that kinda like our Fed writing credit derivatives?  They haven’t done that, right?  That would be illegal, right?  Oh wait, they have done that…

Oh boy……

The Market-Ticker

Spike in US CDS (credit default swaps):

Containment Fails: European CDS Explode As Market Looks To Future Bail Outs, Bank Runs

Submitted by Tyler Durden

Now that Greece is thoroughly irrelevant, the market just told the ECB, the IMF, and the EMU to prepare another $1 trillion in bailout packages. The reason: the Greek bailout just made it abundantly clear the bond vigilantes have free reign to call the bureaucrats’ bluff whenever they see fit. The result: CDS of all non Greek PIIGS are now blowing out, and represent the top 4 names of all biggest CDS wideners for the day, each pushing a 10%+ change from yesterday. This movement wider will not stop until the IMF resolves to backstop all the PIIS ex. G. At this point nothing that happens in Greece is important, although the thing that will most likely happen is that the Greek government will fall imminently, killing the austerity package and destroying whatever credibility the EMU and the EU have left, but not before the IMF and the EU soak up another 110 billion euro in their slush funds. However, even with the bailout the Greek stock market is tumbling: the Athens Stock Exchange is now down 3.4% to just under 1,800. As we expected, the euro is about to breach 1.31 support. At that point, not even the US algos and the Liberty 33 traders will be able to prevent the contagion. And adding insult to injury is the latest rumor of an upcoming downgrade or very cautious language of Germany by the suddenly hyperactive rating agencies. When that occurs, you can kiss Europe goodbye.

Biggest CDS intraday movers (from CMA):

Much postulation in the past couple of months about how ‘bond market vigilantes are dead.’  I think those that believe that ought to ask the governments of Greece, Portugal and Ireland.  The cost for funding their ever-increasing debt is going parabolic.

Greek 10-year bond maturing May 19th now trading with a yield of 26% according to Bloomberg.

I’m pretty sure I have a credit card with less than 26% interest. 

Greek 2-year bond at 14.7%.

Greece Bondholders to Face ‘Significant’ Losses, Citigroup Says

April 27 (Bloomberg) — Greece is likely to default or inflict “significant” losses on bondholders unless it receives more generous terms on its planned aid package, according to Willem Buiter, chief economist at Citigroup Inc.

Suffering Greek Contagion Pressures EU Bonds

Portugal risks becoming the new Greece.

With a higher debt burden and a slower 10-year growth rate than Greece, Western Europe’s poorest country is being punished by investors as the sovereign debt crisis spreads. The risk premium on Portuguese bonds rose to more than double the past year’s average this month. Portugal’s credit default swaps show investors rank its debt as the world’s eighth-riskiest, worse than for Lebanon and Guatemala.

Meanwhile, the Greek stock market seems to be having a bit of trouble today.  As of this writing, down over 6% on the day.

ATHEX

I’m sure it’s all contained though….like subprime….

h/t Padrino

UPDATE  11:26 AM ET:

Well, goodness, that didn’t take long:

GREECE SOVEREIGN CREDIT RATINGS CUT TO JUNK BY S&P

S&P CUTS PORTUGAL RATINGS TO ‘A-/A-2′; OUTLOOK NEGATIVE

Is A Big US Bank Betting On A Greek Default In 11 Days?

Submitted by Tyler Durden

Bankingnews.gr has disclosed something interesting. According to the Greek website, an account, allegedly a large US bank, has been dumping, in what it classified as “panic selling”, its holdings of a 10 Year GGB maturing on April 20, 2010, or in 11 days. What is unclear is whether the bank has been trading for its own account or for a client. What is clear, is that the seller is certainly not too convinced that the bond will see a repayment of principalwhen it matures, in other words believes that Greece will go bankrupt before April 20^th.

From the source:

It is clear that this move is panic.

The seller believes that in the next 11 days Greece will go bankrupt, there will be default or anything else to sell a bond expires in 11 days.

Who sold under a sign is a large U.S. bank.

The only thing that has not been established is sold on behalf of a client or on their own behalf?

Both are negative developments …

We did some snooping of our own and uncovered one bond issue that is due on April 20, however it is a 5 Year, not a 10 Year as bankingnews.gr claims. The 5 Year bond in question is a €8.22 billion in size, issued at 100.037, and was trading at 99.9008×99.9058.

Yet even if the Greek site simply mistook the tenor of the bond, a TRACE of recent activity indicates a rather substantial spike in trading (and thus both buying and selling).

To be sure, someone is unwilling to take the risk of picking 20 bps through maturity for holding this bond another 11 days. Alternatively, anyone convinced that Greece is going under in two weeks time, and that this bond will trade flat, can arb the accrued interest by selling today with the expectation that the bond will not only plunge but the 3.1% of accrued interest payment will certainly not be owed. One thing that is certain: this is an outflow of €8.2 billion that Greece would certainly much rather not have to stomach. This bond will take out all the incremental cash generated from the most recent “successful” bond auction and then some.