Merkel Provides Some Sanity To The Anti-CDS Hysteria

Tyler Durden's picture

GERMANY MERKEL: CANNOT BAN CDS MARKET OUTRIGHT
GERMANY MERKEL: MIGHT NEED CDS MKT CURBS TO LIMIT SPECULATION
GERMANY MERKEL: NEED TO CHANGE EU TREATIES TO HELP MEMBERS
GERMANY MERKEL: MUST MULL HOW EMU, EU CAN LEGALLY HELP MEMBERS
GERMANY MERKEL: POINTS TO NO-BAILOUT RULE FOR EMU MEMBERS IN EU TREATY

GERMANY MERKEL: CANNOT RULE OUT NOR AFFIRM ANYTHING
GERMANY MERKEL: FINANCIAL AID TO GREECE NO TOPIC CURRENTLY
GERMANY MERKEL: DON'T SEE IMMEDIATE GREEK DEFAULT RISK
GERMANY MERKEL: SPECULATION PARTLY TO BLAME FOR GREECE WOES
GERMANY MERKEL: A EUROPEAN MONETARY FUND IS A GOOD IDEA

In the meantime, apparently Sov CDS traders are demanding collateral in gold. Aside that this is news to pretty much all CDS traders, let's dissect this argument. You buy CDS on the US, and you tell your counterparty in advance (because, you know practically speaking) this is when the contract determinations are made. Let's say you wish to transact with JPM, one of the top three CDS traders in the world. Of course, JPM realizes all too well what this would do to the price of gold should sovereign risk go higher, either naturally, as a function of 400% debt/GDP ratios (including all unfunded liabilities) or, hypothetically, because every "speculator" wants to jump in on the sov trade for whatever reason. JPM, which is already very much short gold in its prop books, as has been the case with all major banks over the past 50 years, will be very unwilling to execute this transaction, and will tell the other side of the trade to buzz off, and that only €-denominated trades will be accepted. Sure enough, at this point the trade will either collapse, or will be done as per usual, and as has been done over the past 10 years. The conclusion is that suggesting that both sides of the trade would be willing to do it should the trade be denominated in gold is alas, absurd, (although very much welcome for true gold price discovery) as JPM knows too well that this has the potential of unsettling the fragile steep yield curve that it is betting its record future profitability on. There is also this thing called ISDA, which tends to oversee these things (yes, shockingly even though this stuff is OTC, there are rules), and even though Hedge Fund X may demand collateral in one's first new born, saying that this is a possibility is precisely the kind of unwarranted witch hunt that may very well get CDS banned, only for all those who blame CDS for everything to uncover that absent the natural basis hedge for new issuance, that all new Sov bonds will come much, much wider than even existing levels imply.

We urge everyone to consider what the material ramifications are of such speculative allegations.