Greece...

Rochdale_Pioneers

Greecde has gone bust, Greece is bust, Greece will go bust. It cannot pay it debts already, so is bust. Injecting the carcas with EU cash won't bring it back to life, nor will imposing a haircut which will cost Greek banks up to 80% of their capital (instantly bankrupting the entire Greek banking system).

But the current debate isn't about Greece. Its about Germany.

wellused

It appears to me that it is all about Germany, it's all about Germany getting its own way and everyone doing things Germany's way. It appears to me that one day in the future the EU will be called Germany.

ILW

wellused wrote: »

It appears to me that it is all about Germany, it's all about Germany getting its own way and everyone doing things Germany's way. It appears to me that one day in the future the EU will be called Germany.

Bearing in mind that Germany are now paying for the excesses of some other Euro nations, I cannot say I blame them for wanting to have some control.

ILW

pqrdef wrote: »

Now you're being ridiculous. Countries never pay off their debts, they just keep rolling them over.

.

There is a difference between rolling over debt and increasing debt year on year. The former can be sustained, the latter cannot.

wellused

ILW wrote: »

Bearing in mind that Germany are now paying for the excesses of some other Euro nations, I cannot say I blame them for wanting to have some control.

It appears to me that Germany intend to recoup most if not all of the money it lays out, and the exchange rate that it has been enjoying for several years now thanks to country's like Greece and Ireland bringing the Euro exchange down a few notches has benefited Germany's export market a great deal too.

gagahouse

Generali wrote: »

Investment banks sell a sort of insurance called a Credit Default Swap or CDS. This is a derivative product that pays out in the event that a company or country defaults on its debt.


. So what to do? Well obviously you impose a voluntary default which means that you don't have to pay out on CDSs. This, I believe, has been ruled as ok by an organization called ISDA who regulate some parts of the derivatives market.

This is all well and good unless of course you bought a CDS on the reasonable assumption that it'll pay out if Greece defaults. This has left you rather shafted and to make matters worse, Governments and Central Banks aren't facing any loss on their bonds at all. You bought bonds thinking that all were equal (as they were in law) and you bought insurance against losses and still you being done for 2/3rds of your investment or whatever ends up being 'agreed'.

The trouble with bailing out the insolvent is that it makes the previously solvent insolvent as well.

I am led to believe that there is one bank that is on the hook for a huge amount of CDS. I can't name names as it is irresponsible at times like this. You will have heard of them but will be unlikely to have any money with them, directly at least.

The ISDA determination committee hasn't ruled yet on Greek CDS as nothing has happened yet. Now imposing "a voluntary haircut" is an oxymoron but you know that! I don't see how ISDA can rule it is anything other than a credit event under the term of "restructuring" and therefore it will trigger the CDS.

The Greek CDS issue is blown out of all proportion, net notional outstanding Greek CDS is approx 5bn while there is total Greek debt of 300 bn. I think the hit the banks take on the debt is going to be more important than 5bn of CDS written mainly by US banks.

gagahouse

tomterm8 wrote: »

CDS are not insurance policies. With an insurance policy, there is a legal requirement that you own an insurable asset. In other words, you can't insure your neighbours shed, you can only insure your own shed (and even then, you only get back the actual cost of replacing the shed).

Basically, there is a good reason for the law to restrict insurance in this way, because otherwise it would make burning down your neighbours shed quite a lucrative business strategy.

At it's heart this is part of the problem: it is more lucrative for the creditors of Greece to force a default, than agree to any restructuring even if this restructuring would result in Greece paying back more money on their bonds over the longer term.

What if you own the bond and bought CDS on it? What is wrong with that, do you not have an insurable interest then?

The problem you describe is that of 'naked'" or uncovered CDS, here I would agree they pose systemic risk issues because they create perverse incentives.

StevieJ

wellused wrote: »

It appears to me that it is all about Germany, it's all about Germany getting its own way and everyone doing things Germany's way. It appears to me that one day in the future the EU will be called Germany.

Or the 4th Reich, there is more than one way to skin a monkey :eek:

ILW

StevieJ wrote: »

Or the 4th Reich, there is more than one way to skin a monkey :eek:

The thing is, Greece etc walked into it with their eyes open. Probably just getting what they deserve.

Generali

gagahouse wrote: »

The ISDA determination committee hasn't ruled yet on Greek CDS as nothing has happened yet. Now imposing "a voluntary haircut" is an oxymoron but you know that! I don't see how ISDA can rule it is anything other than a credit event under the term of "restructuring" and therefore it will trigger the CDS.

The Greek CDS issue is blown out of all proportion, net notional outstanding Greek CDS is approx 5bn while there is total Greek debt of 300 bn. I think the hit the banks take on the debt is going to be more important than 5bn of CDS written mainly by US banks.

You are correct, it's daft of me to suggest that ISDA can sign off on an 'agreement' that is yet to be imposed!

My understanding is that what concerns regulators is not net notional but gross unhedged exposure. As banks that had hedges with Lehman in place found, it's hopeless to report a net exposure if one side ofthe deal goes bust.

To explain for the uninitiated, bank insolvency is pretty complex but part of it boils down to this: let's say Usary Bank has bought $100,000,000,000 of CDS from Vampire Squid Bank and also sold $95,000,000,000 of CDS to various companies. Now Vampire Squid's net exposure is $5,000,000,000 which is no problem, they can cover that by halving the CEO's bonus and sacking some pregnant staff members.

Now imagine Usary Bank has gone bust. All of a sudden, Usary Bank is an unsecured creditor. The CDS it has bought aren't going to pay out on time and when they do the chances are it'll be for a fraction of what they were expecting. Now their net exposure is a lot closer to $95,000,000,000 than they would be comfortable with.

In normal times, net exposure is a perfectly reasonable and non-hysterical way to look at things. However these are far from normal times.