Comments on: Europe’s half-baked deal

By: dWj

dWj — Fri, 28 Oct 2011 03:01:36 +0000

They should borrow the $750 billion from French banks. This would reduce the transfers involved, not to mention the ultimate counterparty risk.

By: Auros

Auros — Thu, 27 Oct 2011 21:19:09 +0000

The idea of the Fed being broke is kinda laughable. As long as they’re willing to tolerate somewhat higher inflation (which arguably would be a good thing — http://www.interfluidity.com/v2/2347.htm l ), the Fed can have as many dollars as it damn well pleases.

By: johnhhaskell

johnhhaskell — Thu, 27 Oct 2011 19:52:28 +0000

Fbreughel1: Felix’s comments about how difficult the ECB found it to buy Spanish and Italian debt are 100% correct. Also, the Fed is not broke. It actually has plenty of dollars. Try to pay attention.

By: alea

alea — Thu, 27 Oct 2011 17:38:09 +0000

@KidDynamite:
Yes, AIG had a massive NET exposure, non-collateralized (until the downgrade) and was THE only market for certain types of CDS.
The EU situation has nothing to do with that, the NET is very small (vs total bonds outstanding), collateralized and (relatively) liquid.

By: KidDynamite

KidDynamite — Thu, 27 Oct 2011 17:27:47 +0000

@Alea – thanks for the other reply. I think that one problem us non-CDS experts have here is that we think of AIG 2008 – and the problems arising there – but this Euro situation is very much NOT like that, right? In other words, with AIG, the NET exposures were massive – the banks all bought protection, and AIG sold it to them…

By: KidDynamite

KidDynamite — Thu, 27 Oct 2011 17:25:53 +0000

@Alea – let me ask you a simpler question: if the NET CDS exposure is under $4B, then that implies that the current market setup was NOT a lot of parties who bought and hedged (with CDS) Greek debt, right?

and the next step is to conclude (which I think is your point), that this voluntary exchange not triggering a CDS credit event is not a big deal and is being blown out of proportion in a big way.

am I on the right track now?

thanks in advance…

By: alea

alea — Thu, 27 Oct 2011 17:22:39 +0000

Gross positions irrelevant. Read this:
“Net notional positions generally represent the maximum possible net funds transfers between net sellers of protection and net buyers of protection that could be required upon the occurrence of a credit event relating to particular reference entities.” http://www.dtcc.com/downloads/products/d erivserv/tiw_data_explanation.pdf

By: KidDynamite

KidDynamite — Thu, 27 Oct 2011 17:15:48 +0000

@Alea – I saw that $3.7B number… but the gross number is $75B. Something is hurting my brain thinking about how we can’t just ignore that here when thinking about incentives of the parties involved. ???

and yes, I did read this:

http://ftalphaville.ft.com/blog/2011/10/ 27/713826/how-gross-and-net-cds-notional s-really-work/

By: alea

alea — Thu, 27 Oct 2011 17:00:16 +0000

@KidDynamite:
The CDS position is not significant, the net notional is only $3.7 bln and even if 100% of that is covered by bonds (unlikely) and they don’t participate in the restructuring it doesn’t matter (we are talking €205 bln float for the restructuring). But as far as the CDS is concerned, Greece has not defaulted yet, and no restructuring has occurred yet, it will take months before the restructuring is effective and since it’s not mandatory, it won’t be a credit event.

By: FBreughel1

FBreughel1 — Thu, 27 Oct 2011 16:55:43 +0000

“One place the money’s not coming from is the ECB, which found it hard enough just to keep on buying bonds from Spain and Italy”

Euuh, Felix, you do know this the ECB represents the largest economy on earth, do you ? This is not the Fed (which is quite broke).

By: KidDynamite

KidDynamite — Thu, 27 Oct 2011 16:45:39 +0000

@Alea – so does it then stand to reason that anyone with a CDS position would not accept the restructuring offer?

By: alea

alea — Thu, 27 Oct 2011 16:40:07 +0000

@KidDynamite:
yes

By: KidDynamite

KidDynamite — Thu, 27 Oct 2011 16:00:21 +0000

@alea – what happens to you if you decline to restructure?

what if you’re long greek bonds, and long CDS protection against it? If I’m understanding this correctly (a long shot), then you can keep your position, you do NOT collect on the CDS because it’s not a credit event, but you CAN collect in the future when Greece actually defaults on the old debt that you didn’t restructure?

???

By: alea

alea — Thu, 27 Oct 2011 15:02:24 +0000

” But on the other hand, this does make a farce of the idea that credit default swaps constitute default protection, at least in the sovereign arena.”
No, it doesn’t, the CDS doesn’t pay if the restructuring is not mandatory. RTFC.

By: hariknaidu

hariknaidu — Thu, 27 Oct 2011 14:42:08 +0000

Your logic is politically naive and irresponsible – principally because I respect your views and analysis generally.

The bottom line, here, is that Dallarra was imposed upon by Ecofin Junker to accept it or forefit IIF banks bonds when Greece defaults!

Try to accept this as a faita compli!