Comments on: Greece: What happens if bondholders hold out?

By: realist50

realist50 — Wed, 25 Jan 2012 20:25:45 +0000

Eric377 – I agree with you, and the possible answers would be either (1) an ideological opposition to CDS as “speculation” or (2) a fear that paying out on CDS would cause financial distress to banks. Commentators – I think including Felix – have pointed out that (2) is extremely unlikely based on what’s known about the relatively small amount of Greek sovereign CDS that has been written. In either case, it’s yet another reason that I think we’ll see a “lack of sound contractual law” risk premium on peripheral Euro-zone sovereign debt for years to come.

By: Eric377

Eric377 — Wed, 25 Jan 2012 18:25:23 +0000

Instead of trying as hard as possible to avoid the label of a credit event, Greece would be better advised to simply announce it as such. Why go to great lengths to make sure that your bondholders’ counterparties don’t have to make good on their contracts? Doesn’t make any sense to give a significant haircut to your creditors and try to do it in a way that makes it even more painful for them. If this situation isn’t exactly what the CDS product is for, then what is?

By: scythe

scythe — Wed, 25 Jan 2012 18:14:52 +0000

Der Spiegel had a better twist on trimming the unruly hedges into shape (http://www.spiegel.de/international/eur ope/0,1518,811295,00.html)

(quote) The strategy does have one snag. The hedge funds assume that in the event of a payment default all CDS providers can pay. That is by no means certain, though. The CDS papers are distributed opaquely throughout the financial system. No one knows for sure who holds them at a given time, and who, in the end, will be responsible for them …. Under that scenario, it would also likely affect the hedge funds.

snip snip snip where it hurts – in the gambler’s pockets

By: realist50

realist50 — Wed, 25 Jan 2012 17:21:40 +0000

Treating an identical bond differently based on the holder (ECB vs. private) is a terrible idea, both philosophically and practically. Let’s see how fast private holders dump bonds in future instances of the ECB acquiring significant holdings of sovereign debt.

By: johnhhaskell

johnhhaskell — Wed, 25 Jan 2012 17:01:13 +0000

How does Greece raise any additional money in the markets after they pass this brilliantly conceived “Australian option”? “Trust us, we probably won’t do it again”?

By: klhoughton

klhoughton — Wed, 25 Jan 2012 14:48:24 +0000

The Greeks can use the Australian option: pass a law that says that payments on the existing bonds are to be taxed at 70%, withheld at the source.

There is no need to negotiate with the vulture funds, and the funds themselves are figuring that out.

By: TheSweeney

TheSweeney — Wed, 25 Jan 2012 11:45:58 +0000

The difficulty with agreeing any Greek voluntary default is that 90% of all Greek bonds are issued under Greek law and they contain no Collective Action Clause allowing for a supermajority to over rule a minority of dissenting bondholders. The Greeks could retrospectively pass a CAC but it appears clear the ISDA would have to rule the triggering of this to be defaulting credit even. Hence it isn’t clear how the Greeks can compel all bond holders into a voluntary agreement. Forty percent of bondholders, such as the ECB, claim to be public bondholders and as such they refuse to take a haircut and if another minority of private bondholders, with CDS protection we can assume also dont want to get involved, then why would other bondholders act as suckers and get a 70% haircut. I suspect the market will call the bluff on this and the EU-IMF-ECB will invent some fudge to get around he mid March deadline.