Greek CDS Surges To All Time Record On Talk Accord For Greek Bailout Faces Major Obstacles

Tyler Durden's picture

Nobody could have seen this coming. According to RanSquawk, there is "Market talk that accord on new Greek bailout faces major obstacles." Whether true or not is irrelevant: the market sells first. Greek CDS just hit 1,474, +63 bps and an all time record high. Elsewhere, the EURUSD is dropping as the house of cards appears to be finally on the edge.

And the original story from Market News:

PARIS/ATHENS (MNI) - The need for a new Greece bailout deal is growing more urgent, but serious obstacles remain and it is not yet certain that officials will be able to craft an accord satisfactory to all constituents, senior EU and Eurosystem sources told Market News International.
Tuesday's request by German Finance Minister Wolfgang Schaeuble for a seven-year extension on Greek debt has crystallized the debate, underscoring the divide between Berlin and the European Central Bank over involving private creditors in any new bailout package.
Despite public declarations last Friday that an agreement in principle had been reached, two major problems threaten to block a deal, the sources said.
One is the highly sensitive issue of private sector contribution.  The other is the insistence of European officials and the International Monetary Fund that the Greek parliament pass significant new deficit-cutting measures before EU leaders meet at the end of June as a condition for new money. That task appears Herculean, given the rapidly growing domestic political and social resistance.
In addition to the tens of thousands of protesters surrounding parliament almost daily, Greek Prime Minister George Papandreou also faces increasingly angry opposition from senior members of his own party, both in the cabinet and in parliament.
The anger is directed at new proposals dictated largely by the European Commission, the ECB and the IMF -- the "troika" -- to cut thousands more public sector jobs, raise taxes further and sell off at least E50 billion in state assets over the next four years.
"As we speak, it is not clear whether the Greek government will be passing the medium-term fiscal plan and the privatization program from parliament before the end of the month," said one senior EU source. "And that is a delay which give an excuse to certain European governments to delay the deal."
For now, this source said, the plan is still for the EU and IMF to pay Greece a E12 billion loan tranche from the current E110 billion bailout package around July 8 and "commit in principle" to new aid that includes participation of the private sector.
Payment of that E12 billion will keep Greece going financially for at least a few more months in case it takes longer to put a new financing package in place.
"Since there is disagreement as to how the [private sector creditor] participation will be carried out, the final details of the plan could take us up to September, when the next tranche of the current loan will be discussed," a senior Eurosystem source cautioned.
Because Greece is now not expected to regain market access next year, or perhaps even in 2013, officials believe it will need about E70 billion in additional funds starting in 2012, with some reports putting the number as high as E100 billion. The current plan, approved in May 2010, assumed the country would return to capital markets in 2012.
The IMF was unwilling to pay its share of the current loan unless there was agreement on a new bailout. With the agreement in principle, it seems to have softened that position. But if there is still no concrete deal by September, the next tranche of the current package due then could be threatened.
For now the deal is being held hostage not just to Greek politics but also to the increasingly open and often virulent dispute between Germany and the ECB over private creditor participation in a new bailout.
In his letter to fellow Eurozone finance ministers on Tuesday, Schaeuble demanded that Greece be allowed to exchange its outstanding bonds for new ones, extending their maturity by seven years. "All additional financial support for Greece must include fair burden-sharing between taxpayers and private investors and must help Greece return to solvency," Schaeuble wrote, according to media reports.
In the past few days, the three major rating agencies -- Standard & Poors, Moody's and Fitch -- have all weighed in, declaring that they would likely regard such an approach as a de facto default.
The ECB has spoken out in the strongest terms against the German approach, warning that even a so-called "soft restructuring" or "reprofiling" would have dire consequences for Greece and could impact other Eurozone states. The central bank itself is the largest holder of Greek bonds, with about E45 billon on its balance sheet.
"In a sense the ECB is in a bind," said another Eurosystem central banker. The central bank agreed to buy Greek bonds under pressure from the governments last year, "and now there is talk of possible haircuts, which devalues the underlying assets that have been used as collateral and are being held on the ECB's books. That was not part of the original understanding and, if you like, it has changed the rules of the game."
More recently, however, the ECB has expressed willingness to consider a deal in which holders of Greek bonds would agree, upon maturity of their holdings, to reinvest the proceeds in new Greek paper, thus reducing the financing need of the government in Athens. This so-called "Vienna Initiative" was used to ease the debt burden of some eastern European states in 2008-2009.
However, Schaeuble said in his letter that private sector involvement in any new deal must "go beyond a simple Vienna initiative."
Whether we're talking about the German approach or a softer one acceptable to the ECB, it is hard to see what incentives could be offered to encourage enough private sector participation to make a tangible difference for Greece.
After all, investors would have to accept far less than the current 16.5% market rate on seven-year Greek bonds, otherwise their participation would only be counter-productive. Anyway, like the rest of the market, they expect Greece to default sooner or later.
The ECB believes that assurances must be given to bondholders in order to ensure that enough of them will agree to participate, the senior Eurosystem source said. The ECB is proposing that private sector participation "should not exceed E20 billion and should come mainly from the Greek banks and institutions that share a common interest for the success of the Greek plan," the official said.
There should also be incentives, he continued. One idea is for the European Financial Stability Facility to guarantee the new bonds or even to buy paper issued by the Greek debt agency. But this is meeting with resistance from Germany and other countries.
Another idea is for Greece to put up collateral as a guarantee against the new bonds. This might include real estate and other state-owned assets. "ECB has stated many, many times before, that Greek real estate should be a driving force behind the reduction of the debt," the senior Eurosystem official reminded.
All of these issues are being discussed by a task force formed by the European Council to discuss a new aid package.
The wrangling over Greece -- and particularly the uncertainty about whether private creditor participation might be considered a default -- may well be one of the factors holding up publication of European bank stress test results, which has been pushed back from June to July.
As the second Eurosystem central banker noted, "there will be no [test] scenarios with a re-profiling of Greek debt. It's all held to maturity under the tests."
Meanwhile, the ECB remains firm on separating interest rate policy from events in the EMU periphery. It is likely to increase interest rates in July and will probably signal such a move at its press conference this Thursday.
"I think with inflation the way it is, you would expect another move soon," said the second Eurosystem source. "And the real economy justifies that. It also sends the right signal as you move into the autumn wage negotiating round. There's no reason to hold off."


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oogs66's picture

even the governements realize this is now a credit problem not a liquidity problem and are trying to address it, but that will take longer...


they will kick this down the road for about 2 or 3 months and then beg bondholders to take a real hit, only way this moves forward.

chunkylover42's picture

I don't know, oogs.  Remember, the ECB and Euro banks are the bondholders, and it would seriously impact capital if they let that happen.  I think they will try to kick the can down the road indefinitely and the market will eventually force the haircut/default.  Fortunately, the more they delay the worse the fallout will be.


oogs66's picture

i have always thought that restructuring would happen sooner than the market expects, I think they fake passed their tests so they can give one more tranche of imf money and then figure out over the next few months (til the next test) how to share the burden of a restructuring and make it as manageable as possible.  it has taken them a long time, but i believe they are now trying to cut their losses.

ratso's picture

You are right. Greece should never have been admitted to the Euro Zone.  They lied their way in and then exploited the hard currency advantage by borrowing large sums to give their citizens benefits they hadn't earned all the while avoiding paying the taxes that would have supported their indebtedness.  Hard to believe that the EU has tolerated this for so long. Goldman Sachs should probably be indicted for criminal fraud by the Hague for having helped the Greeks disguise the extent of their indebtedness prior to their admission to the Euro Zone


edotabin's picture

Greece was admitted based on lies. No doubt.  I am not certain it was only the Greeks lying though. I have written before that you didn't need inside information to realize:

1. Size of the completely overblown public sector

2. Inefficiency of that public sector

3. The country produced nothing

4. Extremely early retirement - very high retirement pay (80% of salary in many cases)

5. About 1.5 million people on some sort of disability

6. Very poor demographics.....ageing population/no children being born

7. Constant defaults in recent history and severe devaluation through constant printing to support 1-6.

One of the simplest examples is Olympic Airways. It's common knowledge that Onasis ran it as one of the better airlines in the world with about 3k employees.  When the government took over (and ran it into the ground) the company had 21k employees.

You don't have to be a top level politician or banker to see the trends here. It was, is and remains a complete disaster.

I could care less about the fact that the EU wants to take over the country as banks have taken over everything anyway. It may work out better in the long term. All I'm saying is everyone involved should have been able to make an informed choice.  When they accepted those 700 euro a month jobs, they thought they were the cat's meow and they were stiffing everyone.  They never realized they were selling themselves and their country out. And, while those pathetic excuses for human beings that weren't even the least bit grateful (on the contrary they flaunted their ability to slack off and get paid) it was partially out of ignorance. Anyone who is Greek or fully understands Greek culture will fully appreciate the previous statement. The banksters knew full well what they were doing.

This is about setting Greece up to be taken over and incorporated into a larger mechanism. Now they are highlighting the dangers so as to gain more support in hopes of having the protesters back down. This is a game of chicken. I am not certain the banksters understand what they are trying to tame and I'm also not certain if the protesters realize how bad their lives will become if they do default. On the other hand, their lives are about to take a dramatic turn for the worse anyway..........

And on yet another hand, Americans work their ass off and are still bankrupt. Germans are being asked to support Greek scams. Maybe those lazy ass public sector employees had it right? It's all a scam and its going down. Might as well take what we can when the going's good. If they push us too hard, we revolt.    ????????????????

StychoKiller's picture

The stupid, it burns!!  It's like watching a bunch of drunks pitching a fit because no one is willing to buy another round.

Cdad's picture

And here comes the blind and debt help lead the blind and debt laden:

SheepDog-One's picture

Its all just a damn joke at this point Cdad. I actually think theyre now just trying to buy some time until whatever 'illuminati secret important date' it is the have set to commence 'Blackjack' and bring it all down.

Cdad's picture

I'm with you, Dog.  'Operation Blackjack' is something I have only been dragged to believing in...and very grudgingly so. But as our govt gallops towards its ultimate confession of insolvency, the debt ceiling issue, and regardless of the path it chooses, we are arriving at that moment in time when Average Joe is going to feel the full effects of GROSS, GROSS misallocation of capital.

The liquidity event will be worse than 2008, and the sheeple will bleat in horror...those that are not already Apple zombies, that is.  And then, Average Joe's freedom will be on the line, meaning that the entire world's freedom will be on the line, in the breach.

The extent to which BlowHorn [CNBC] coverage continues to be utterly irrelevant to what is going on is the extent to which everyone should be hitting the eject button, and selling into the gaping maws of the helmet wearing ETFs which keep the magic levitation act going...until the last underlying stock is hacked up and that gig no longer works.

Do not be fooled by intraday price action on any individual stock, and prepare for the USD studman to enter the scene, his bottle of lube in hand, pissed off, foaming at the mouth, and ready to have his way with every living thing.  No matter how improbable the rise of the dollar might seem to folk, it is a MUST HAPPEN event prior to any announcement regarding uncle Ben Bernanke's counterfeit machine to the rescue.

jkruffin's picture

HFT's going haywire this morning,  I smell the ultimate crash coming.....these fake computer bids not going to hold this ponzi market up anymore...Benny has left the scene and gone underground.

oogs66's picture

The best part about this, is that Greece has become so bad no one even mentions Ireland or contagion.  That should become a topic of conversation again soon.

RobotTrader's picture

Both BBVA and STD are way outperforming NEM and ABX this year.

In fact EEM is still outperforming SPY as of today.

SheepDog-One's picture

Robo flippin the script again...talking about things he's never mentioned before. Hey hows yer bank stocks doin?

ZeroPower's picture

EURUSD such a whore. Keeping it high to crash and burn everyone who shorts literally a pip too early. Seems like nothing short of 'EUROZONE COLLAPSES' will make that sucker drop.

Cdad's picture will drop, I assure you.  Your job is simply to manage the vol by managing the size of your position...that's all. 

The USD studman will emerge in this FUBAR cycle, bottle of lube in hand, pissed off and ready to have his way with every living thing.

Bob's picture

Studman: I love the smell of napalm in the morning.

ZeroPower's picture

+1 at USD studman ready to pillage.

Virtual cheers with bottles of Clicquot when that happens.

scratch_and_sniff's picture

" Seems like nothing short of 'EUROZONE COLLAPSES' will make that sucker drop."  you're only catching on now?

qussl3's picture

When Trichet conveniently "forgets" to mention the V word tmr, look out below.

luciusfargo's picture

Yeah I hate it so much. 

Hedgetard55's picture

OT but a SWAT team in Stockton CA broke into a dude's home - looking for his estranged wife - for Student Loan defaults!

DosZap's picture

Hmmmmmmm,wow, big deal.

Maybe they should have deported the illegal hispanic drunk on his 3rd DWI,that slammed into a man(father of two), at 70 mph while he was stopped on a major hwy here in Dallas,killing him.

There's were SWAT needs to focus, getting these illegal murderers out of the country for good.

DosZap's picture

"All I want is an apology for me and my kids and for them to get me a new door," Wright said.


Generous soul, I would require BLOOD.

Mr. Sheeple's picture

On Drudge:

Obama just pledged US money for Greek debt solution.

DosZap's picture

Yes,Obama(he's so generous!!) has SO much spare cash, he can do it.

I know this will not cut into his Golf green budget.

wombats's picture

Just use some of Bernanke's funny money to bail out Greece.  Great plan.  I'm sure they will return the favor when the US defaults.

chunkylover42's picture

Meh.  We're already a huge chunk of the IMF budget, so we're footing most of that bill anyway.

I suspect that the goal is to provide support and "confidence" to the market for Greek debt.  Unfortunately, the President's words carry significant weight, and he runs the risk of weakening our own hand just to verbally support Greece.

jkruffin's picture

NFLX from being down $3.00 to up $.47 in a matter of less than 5 minutes, and you tell me there isn't some scam being run on people by fake computer bidding?

When this ponzi collapses, I am going to be laughing so the delusional people thinking stocks are safer than real assets.

Capitalist10's picture

My Big Fat Greek Default

PulauHantu29's picture

Why not let Greece break off and then they can devalue their currency and set things straight going back on their own currency?

JamesBond's picture

because they owe so much money to the international banks.  would you want them bailing out on you if that meant losing 'your' shirt?

StychoKiller's picture

Just send in the Euro "repo-men" to seize Greek collateral, a fun time shall be had by all!

Cheeky Bastard's picture

From what I know, ECB doesn't have the power to declare an entity to be in default or not, nor do the rating agencies (not in the scope that would trigger counterparty pay-offs), only ISDA members, trough voting have that power. So whatever Schaeuble and Trichet say or do is a gamble. But they are probably correct given that most ISDA members are the same banks that would have to pay their counterparties 36.4 bln$ if GRE were to default. So, another win for these fuckers, even-though under ISDA provision any such swap and extension constitutes default. Also, as some lawyer said y/day in WSJ, if the extension and swap are "voluntary"; no default, if they're not; default. I'm just interested how do you differentiate between "voluntary" and "involuntary".

Tyler Durden's picture

There would be no incremental fund transfer post default due to daily variation margin on CDS which are most certainly currently trading wider of where ultimate cash settlement on the CDS will be (trading wider of widest Cheapest To Deliver). The basis tells you everything.

CrashisOptimistic's picture

Directing your attention to the Citibank analysis of a few days ago, the nature of Greek debt, Greek law, and other courts, specify that bondholder unanimity is required to avoid declaration of default -- and hedge funds have run out and bought bonds to go with their 10:1 ratio of swaps with the intention of obstructing unanimity.

That triggers their swaps.  Big profit.

oogs66's picture

I don't have the citi analysis, but I think that interpretation is wrong.  Any individual bondholder can voluntarily agree to a restructuring.  If say all the banks agree to some new bonds and all the hedge funds don't agree, then at the end of the day, banks will own the new debt, hedge funds own the old debt, and NO CDS Credit Event.

I also have become convinced that Hedge Funds are currently net long credit via CDS, not short, but that is a separate issue.

ZeroPower's picture

While smart HFs may or may not (i think some analysis here showed they are) be net long credit, the smart shops went out when this whole sovereign mess started and hedged any cheap GRE debt by getting outright long the CDS. The real clusterfuck comes in when a voluntary restructuring is declared, so a loss on the bonds (albeit haircut) and then a loss on CDS which doesn't come to fruition as the credit 'event' is not deemed an event after all.

Blowups anyone?

Miles Kendig's picture


And it would be the "evil speculators" getting their so called comeuppance.  Classic ponzinomics

Canucklehead's picture

I don't think it is that simple.  Case in point, Argentina.

Mind you, they defaulted.  They required 2/3rds of the bondholders to agree to the restructuring.  Those that didn't agree were left with nothing but the opportunity to sue.

That being said, I suspect those dealing with Greece, knowing their history, would want a bigger stick in return for offering lower rates.

oogs66's picture

Voluntary restructuring, so long as notional amount is not changed, is should NOT be a Credit Event from my reading of the doc.


Involuntary is meant to pick up cases where bonds are subject to a vote where some theshold number is crossed and it forces all bondholders to accept the new terms.  If a 90% vote is required, and 94% voted in favor, that would be an involuntary restructuring as some people were forced to agree to a plan they didn't agree to.

I have only looked at a few of the Greek bonds, but none seemed to have a threshold, so no amount of voting can force anyone else to agree.

Why do you have $36.4 billion of counterparty payments if the Hellenic Republic were to default?  That is extremely high relative to the net outstanding.  And as Tyler pointed out below, the up front and variation margin should already cover a large portion of any actual cash that will need to change hands.


agent default's picture

It looks to me that all these agreements are made with a government that is perceived as sold out and treasonous by the Greek people. 

Even if the present government does agree to put up collateral, what happens if the next government decides to default outright, refuses to recognize any of the part of these agreements and tells the IMF/EU to fuck off?  The whole thing seems to be on very thin ice at this point, and I don't see anyone seeing anything than the financial part of this problem.  Meanwhile the underlying politics and radicalization of the masses may get everybody burned.

johngaltfla's picture

Is this the point in time where peole start crying and the banksters have a press conference to say "oops, my bad" and then we're screwed from that point forward?

Yeah, I think so.

SheepDog-One's picture

Yep, I think its that time as well.

mberry8870's picture

Let's just face facts and admit the creditors are going to take a hit. Time to move on.

wandstrasse's picture

Didn't Schäuble utter these nasty 100% bailout-doubts to boost CDS profits?

luk427's picture

They should default now, before they loose their gold and assets. The country's helping them are only doing it to save their own banks.