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Greece...
Comments
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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.
The trouble is, if you hedge your CDS exposure directly by buying a CDS then you have a counterparty risk. If you hedge them indirectly you have to short the bonds one way or another.0 -
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.
You're right, we're not in normal times so you have to think in terms of gross. Last time I looked at DTCC there was 78bn gross outstanding, halve that as it's double counted (xyz bank sells 5bn to abc bank is counted as 10bn) so around 40bn total gross.
Now one bank or two banks can't hold all the exposure so let's say biggest gross unhedged one has 20bn. Still a sizeable hit for one bank but not systemic threatening. The 300bn outstanding Greek debt, well that's a wee bit of a bigger problem!
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But this is necessary, to protect the balance sheets of creditors. If they take big paper losses all at once, they go bust, then their own creditors go bust, etc etc. If they have to take paper losses, they need to absorb them slowly. It matters when losses are crystallised.They're not fixing things, all they're doing is delaying the inevitable
Hardly simple.Simple but painful solution: variable exchange rates with the periphery leaving the Euro and until the populous realises that the charade continues."It will take, five, 10, 15 years to get back to where we need to be. But it's no longer the individual banks that are in the wrong, it's the banking industry as a whole." - Steven Cooper, head of personal and business banking at Barclays, talking to Martin Lewis0 -
You're right, we're not in normal times so you have to think in terms of gross. Last time I looked at DTCC there was 78bn gross outstanding, halve that as it's double counted (xyz bank sells 5bn to abc bank is counted as 10bn) so around 40bn total gross.
Now one bank or two banks can't hold all the exposure so let's say biggest gross unhedged one has 20bn. Still a sizeable hit for one bank but not systemic threatening. The 300bn outstanding Greek debt, well that's a wee bit of a bigger problem!
Well indeed. AIUI there is a school of thought that goes that Greek CDS don't matter a fig and this is really about punishing the evil derivatives market users.
I like this, linked to from an old FT Alphaville piece:
http://macro-man.blogspot.com/2011/10/tmms-ex-product-sketch.html?"I wish to complain about this CDS what I purchased not half a year ago from this very investment bank"
"Oh yes, the Hellenic Republic... What's wrong with it?"
"It's not paid out, that's what's wrong with it."
"No, no, it's just voluntary, look."
"Look my lad, I know a dead product when I see one, and I'm looking at one right now"
"No, no, it's not dead, it's just voluntary."
"Voluntary?!"
"Yeah... remarkable product, Sovereign CDS... beautiful name, innit?"
"The name don't enter into it. It's not paid out."
"Nah, nah... it's voluntary"
"Alright then, if it's voluntary, I'll ask it again... HELLOOOO ISDA! I've got a nice bid/ask spread for you when you pay up, ISDA CDS!"
"There it moved"
"No it didn't, that was you pushing the market"
"I did not!"
"Yes you did! Helloooo ISDA!! IIIISSSSSDDDAAAAA!!! ISDA CDSSSS!!! PAAAAYYYY UUPPP!!! ISDAAAA.... ...now that's what I call a dead product."0 -
What gets me is that Greece still seems to do nothing to address the deficit. There are 800,000 public sector workers in Greece who get a punctuality bonus: yes, you heard it right. They get a bonus for turning up to work on time.
It's utter nonsense.0 -
What gets me is that Greece still seems to do nothing to address the deficit. There are 800,000 public sector workers in Greece who get a punctuality bonus: yes, you heard it right. They get a bonus for turning up to work on time.
It's utter nonsense.
Whilst I agree about the ridiculous nature of that bonus, and many other daft parts (13 months wages anyone?) the Greeks have now achieved primary surplus. ie the only thing that means they are now in deficit is the interest on the loans.
Clearly some progress has been made.0 -
What gets me is that Greece still seems to do nothing to address the deficit. There are 800,000 public sector workers in Greece who get a punctuality bonus: yes, you heard it right. They get a bonus for turning up to work on time.
It's utter nonsense.
What do you propose they do in order to fix the deficit, given that:
1. Their current debt to gdp is 148% or more and
2. They can't borrow money on the open market, but the last time they could they were borrowing at in excess of 10% interest, in an economy that is shrinking 5% a year due to the cuts they have already imposed.
My personal view is that if you were to take a human with the same debt dynamics into the debt free board on MSE, they would be told to either increase their income (if that was possible, which it isn't in greece's case), restructure their debt (at a lower interest rate over a long period of time, which is not possible for greece) or, if that were not possible, they should default (either a nice orderly one, or a disorderly one, but either way the creditors are not going to get back all their money).
Nothing personal, it's just business.“The ideas of debtor and creditor as to what constitutes a good time never coincide.”
― P.G. Wodehouse, Love Among the Chickens0 -
JonnyBravo wrote: »Whilst I agree about the ridiculous nature of that bonus, and many other daft parts (13 months wages anyone?) the Greeks have now achieved primary surplus. ie the only thing that means they are now in deficit is the interest on the loans.
Clearly some progress has been made.
Are you saying that their tax take is now higher than their total government expenditure?0 -
Are you saying that their tax take is now higher than their total government expenditure?
He's saying their tax take is higher than their total government expenditure except for the cost of servicing interest on their existing loans.
edit: but if they were to roll over their existing debt into new debt, at the current market rate their deficit would be higher than the UK's simply in order to finance their debt.“The ideas of debtor and creditor as to what constitutes a good time never coincide.”
― P.G. Wodehouse, Love Among the Chickens0
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