Barclays Explains Why A 50% Greek Haircut "Would Be Considered A Credit Event, Consequently Triggering CDS Contracts"

Tyler Durden's picture

Barclays, a voting dealer of the ISDA determinations committee, two short days ago made the following statement: "In our view, there is little doubt that a large notional haircut of c. 50-60% would be considered a credit event, consequently triggering CDS contracts." Since the entire Greek bailout now centers around ISDA refuting what one of its members has said on the public record, and effectively making any form of sovereign hedging via CDS null and void, we can't wait to hear just what excuse the International Swaps and Derivatives Association will use to justify the transfer of billions of monetary ones and zeroes equivalents into its electronic pocket in the process making a complete mockery of its mission statement, presented as follows: "ISDA fosters safe and efficient derivatives markets to facilitate effective risk management for all users of derivative products." We expect ISDA to release a statement imminently, as CDS traders will have to know how to treat existing protection before the US CDS market opens around 5:30 am. And since we already know what the release will say, (though we are very curious as to how ISDA will deny what is glaringly obvious), we urge readers to address all their concerns, furious anger and profanities at this grotesque sacrifice of a self-professed responsibility for "effective risk management" at the altar of the almighty dollar, to the following address...

360 Madison Avenue, 16th Floor
New York, NY 10017
Phone: 212 901 6000
Fax: 212 901 6001

and even better, here is who is Deputy CEO ISDA Europe: George Handjinicolaou

What do you know: a Greek!

In the meantime, here is once again a full repost of Barclays validation why a 50% haircut is and always will be a hard credit event.

The Dealbreaker: Barclays Sees A 50-60% Haircut As A CDS Trigger

Finally someone dares to go ahead and say what is on everyone's mind, namely that proclaiming a 60% "haircut" as voluntary is about the dumbest thing to ever come out of ISDA. As is well known, the ECB and the entire Eurozone are terrified of what may happen should Greek CDS be activated, and "contagion waterfall" ensue. The fear is not so much on what happens with Greece, where daily CDS variation margin has long since been satisfied so the only catalyst from a cash flow market perspective would be a formality. Where it won't be a formality, however, is for the ECB which has been avoiding reality, and which will have to remark its entire array of Greek bonds from par to 40 cents on the dollar, which as Alex Gloy indicated earlier, will render the central bank immediately insolvent all else equal. What it also will impact is treatment of all other banks and pledged collateral valuations which is effectively the only bridge in the chasm between Mark to Unicorn and reality. So here is Barclays with what can be the effective dealbreaker, because if a bank: an entity that owns the credit event determinations committee at ISDA, comes out with a contrarian statement to the conventional "stick your head in the sand" wisdom, then pretty soon everyone else will have to follow sui: "In our view, there is little doubt that a large notional haircut of c. 50-60% would be considered a credit event, consequently triggering CDS contracts." And here is why Wednesday's summit is now guaranteed to be a flop: "We consider that launching a hard restructuring without the adequate backstop could be too risky from a financial stability perspective, and we think the ECB would likely take this view." Since the summit will have to announce a decision on the Greek haircuts to be taken even remotely seriously, and since the ECB simply can not make one at this point, look for major disappointment, whether the summit is Wednesday, Thursday, next month, or next year, simply because the ECB will not be ready to pull the trigger for a long, long time.

What happens when a 50% Greek default is declared a "Credit Event"? Here is Barclays' Antonio Garcia Pascual with the explanation:

The FT is reporting today that "European negotiators" have asked the Greek government to impose a 60% notional haircut on sovereign bonds. The EU stance was apparently presented over the weekend by Vittorio Grilli (head of the Italian Treasury and lead European negotiator) to the IIF. Press reports over the past two days have also indicated that the IIF has warned against any haircuts above 40% as they would not be voluntary. The FT also reports that the ECB, France and the IMF remain concerned of the likely credit event and the trigger of CDS contracts. German and Greek newspapers argue that investors should brace for losses between 50% and 60% but they do not provide details as to whether this would imply notional haircuts or whether it would be done through drastic reductions of the coupon and/or extension of maturities. Ekathimerini indicates that Greek FM Venizelos had referred to a "radical haircut" that would not threaten the stability of the Greek economy. 

Also, several Greek and international press reports have reported on a leaked draft debt-sustainability-analysis carried out by the IMF in the context of the 5th programme review. The report appears to indicate that a deeper PSI has a vital role in establishing sustainability of Greek debt. In order to reduce the debt below 110% of GDP by 2020, the report indicates that it would require a face value reduction of at least 60% of Greek debt and/or more concessional official sector financing terms.

Our views on a "hard" restructuring

In our view, there is little doubt that a large notional haircut of c. 50-60% would be considered a credit event, consequently triggering CDS contracts.

However, this would imply that the ECB would have given up its "resistance to a hard restructuring". In our view, that resistance has been motivated by concerns on the potential impact of CDS-triggers across the European financial institutions (FIs) and, more broadly, on concerns on financial stability, in particular on the potential trigger of a bank run in Greek institutions and the scope for contagion to other EMU countries. A hard restructuring would have its largest impact on Greek FIs, which hold more than EUR80bn of Greek debt, of which c.EUR45-50bn is held by banks (including bonds and T-bills).

We have argued in several research reports that the ECB could accept a hard restructuring (eg, 50-60% haircut) only after adequate safety-nets are in place. Specifically:

  • EFSF has adequate financial resources and there is agreement on how to best deploy them, including in the form of a second programme for Greece;
  • Italy and Spain have sufficient support from the EFSF and ECB and the countries are committed to deliver the needed adjustment policies (ie, Italy delivers pro-growth policies and reduces public debt-stock, including through privatisation; Spain completes the restructuring and recapitalisation of the cajas and contains regional deficits);
  • ECB maintains its exceptional liquidity facilities, including the SMP programme for as long as is required;
  • ECB provides full liquidity support for Greek banks even in the event of a sovereign restructuring (EFSF and IMF, in the context of the Greek programme, would provide funds to recapitalise Greek FIs)

We consider that launching a hard restructuring without the adequate backstop could be too risky from a financial stability perspective, and we think the ECB would likely take this view. Therefore, we would see scope for a possible delay in the announcement of a hard restructuring (ie, a specific size of the haircut) unless there is a substantive announcement on all the other fronts mentioned above.

Other likely implications of a hard restructuring, include:

  • A 60% notional haircut would imply a similar reduction in the collateral available to banks using EGBs as collateral (however, collateral at the ECB should normally be MtM, so to the extent it is marked in the 40s, then a 50-60% haircut should not have a substantial impact).
  • The ECB would need to authorise a larger use of ELA by Greek banks, which are already using EUR21bn.
  • Euro area countries would need to decide how to treat ECB holdings of Greek debt under the SMP programme, c.EUR45bn.  A possibility is for the ECB to be taken out of its exposure (possibly by the EFSF) before launching a hard restructuring.

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tom a taxpayer's picture

Is credit event? It depends on what the meaning of the word "is" is.

Oh regional Indian's picture

Is : Reality 


As you can See : Fiction

Looks like a huge wind-up. Shiver me timbers etc.


An Audio Visual Journey

Harlequin001's picture

Ok, so explain to me then how a 50-60% writedown can possibly be considered as anything other than a credit event?

and then explain to me what the point of a CDS is if this isn't it.

and please spare me the bit about 'derivatives are for trading, not for collecting...'


qussl3's picture

Haircut taken on the creditor's initiative.

Debtor took no action to force.


No credit event.


Harlequin001's picture

Magic. No credit events with gold, eh...

Unless of course, you're with GLD...

Now let me see, the only way as I understand it to force a collective haircut on all creditors is through bankruptcy in one form or another. So even one fund manager insisting on full payment would effectively force either a claim for preferential treatment or a default, otherwise it is the insolvency route. I still don't see how this is not a CDS event...

Personally I find it somewhat staggering that these clowns would try to negotiate a 'market rate' based on whether they can or cannot avoid a default.

A market rate is precisely that, regardless of derivative contracts...

Time to start really benefiting from the consequences of all that 'financial innovation'...

flacon's picture

Is this the moment of nuclear fission? Or will the communist leaders in charge of the global monetary system resort to their LAST DUTY?


 “The last duty of a central banker is to tell the public the truth.” -Federal Reserve Board Vice Chairman Alan Blinder

Harlequin001's picture

The only time a central banker is ever going to tell you the truth is when they tell you it's over, last week, and oh by the way, here's the bill...

Please pay promptly to avoid penalties...

DoChenRollingBearing's picture

All of these little Euro-thingies going on are non-events.  Stop worrying!  This ain't no stinkin' Credit Event!


Of course they will find a way to muddle this one through, just as always.  And they will keep on doing it. 

Until it does not work anymore

Harlequin001's picture

The Fed will pay. It's the only entity that can...

Don't you just love this spreading wealth around mularky. It's just so easy, fast and well, relatively inexpensive, for me anyway.

goldenbuddha454's picture

I'm not an expert, but it seems like it is obviously a "credit event" a trigger, if you will, setting off the CDS contracts against Greek sovereign debt.  The problem is will the governing body representing the CDS financial system consider it as such.  How can they not?  If they do consider it a "credit event" then a bunch of money is going to be hemmorrhaging out of the banks selling the CDS contracts thus causing a major run, but in all likelihood, they will not lable it a "credit event" to prevent a complete collapse of the banking system.  How many trillions have been bet against Greek debt?  How much is actually backed by hard money in the CDS contracts?  What will happen as a result of the moneys not being paid out per the CDS contracts will be that noone will want to buy interest in the CDS's anymore thus shutting down the whole CDS game in its entirety, thus shutting off the flow of needed income to the sovereign debt countries and entities, thus shutting off the flow of needed money to continue unending spending, entitlement programs, public pension obligations etc..etc...IMO

kengland's picture

" of its members"


You just gave them an out

qussl3's picture

Cant remember the guest's name, but someone on CNBC made an observation that this was the portfolio insurance debacle redux.

If your hedges dont work you dump the crap.


SGS's picture

Feta.  Hands down.

Big Ben's picture

If this is determined NOT to be a credit event, then what about all the banks (like MS) that claim to have their European exposure hedged?

Just wondering...

flacon's picture

They will say "The hedges are there for a catastrophie, obviously this situation is TRANSITORY.". Move along! Move along!

Unprepared's picture

ISDA isda boss ... do not argue

kito's picture

last one to file a federal class action lawsuit against the isda is a rotten egg!!!!!

Oh regional Indian's picture

Though, DUMPtyesque, they'll feel more like a broken egg.

Must be tough, trying to drink from a firehose.


StychoKiller's picture

Hmm, 40% pregnant or 60% pregnant -- something very wrong with the EU math here...

Mactheknife's picture

>What do you know: a Greek!

Priceless...literally. Like good ole Uncle Warren said, "When the tide goes out, you get to see who was swimming in the CDS ocean, naked or not." (Close enough for government work.)

Harlequin001's picture

'(Close enough for government work.)' - Now, where have I heard that saying before? The military, perhaps...

dark pools of soros's picture

they do still use hand

Harlequin001's picture

I thought it was all done with cruise missiles these days...

hand grenades are so... yesterday...

Oh regional Indian's picture

It's Predators Droning on now actually. Cruise misslies are so yesterday, nein?


Harlequin001's picture

I thought the only thing 'droning on' these days was the ECB.

On the subject of Predators, I was thinking of building myself a model aeroplane and going to war with a few small countries myself...

UP Forester's picture

Anyone know what it'd take to scramble a Predator uplink?

Just for educational purposes, of course.

Harlequin001's picture

Yep. A Browning 9 mil at the back of the head and a 'Hand over your password or I shoot your dog...'

UP Forester's picture

Damn.  I'm way too far away from Nevada to do that, I guess I'll have to figure out how to build an EMP device.

For educational purposes, of course.

Mitzibitzi's picture

Basically, you can't, absent a pretty powerful broad-spectrum jamming suite, which would simply make you a peachy target for an anti-radiation missile.And even that wouldn't work very well if the link is tight line-of-sight.

It's frequency agile and encrypted a bunch of ways. I know more or less how that kinda shit works (I worked on similar stuff when I was in the RAF) and I'm pretty sure (99+% sure, in fact) I couldn't do it, even with schematics of all the hardware and copies of all the code. Nor would I want to! You start messing with systems like that and innocent people are gonna get killed if it goes out of control and crashes somewhere. A couple of Hellfire warheads and a bunch of fuel would make one hell of a mess in a residential area.

I imagine they'd be pretty well shielded against EMP, too. Certainly would be if I'd designed the thing. Which leaves you the 'go up there in your Cessna and shoot it down' option. And they can shoot back, ya know.

The only hope against most modern military weapons is that the operators may refuse to employ them against domestic civilians, no matter what 'terrorist' bullshit reason they're given for doing it.

Also bear in mind that if it ever comes to military action against a domestic population in open insurrection, the dust will be wiped off all those cluster bombs, FAE bombs and hyperbaric weapons we're too civilised to use against foreigners (when the media might be watching, anyway!). Civil wars are almost always far more brutal than the foreign ones.


prophet's picture

Reapers.  Behind the times.


maxw3st's picture

"...the only bridge in the chasm between Mark to Unicorn and reality..." Pay no attention to the man behind the curtain. But CDS holders will be looking for theirs. And rightfully so.

tekhneek's picture

"Do you see what happens Larry? When you fuck a stranger in the ass? DO YOU SEE WHAT HAPPENS?!"

Dr. No's picture

The selective write down on selective bonds is Sarc killing off his political enemies. Business as usual in politics. Just dust off your 2008 Fed playbook to see who was on the side of the Fed shareholders and who wasn't. Same goes with Europe. If you look to see who got a haircut, you will quickly find the list of Sarc's foes.

kito's picture

from reuters:

"The debt is absolutely sustainable now," Papandreou told a news conference after a meeting of euro zone leaders, which reached agreement with private investors on the 50 percent writedown.

Papandreou added a promise that Greece would produce no more primary budget deficits from next year.


BillyBoy22's picture

You guys will tell me when its time to start stockpiling weapons right

DoChenRollingBearing's picture

BB22, UP is correct.

Old Chinese saying (really, no joke):

"The best time to plant a tree was 20 years ago.  The second best time to plant a tree is NOW."

AndrewJackson's picture

What was morgan stanley saying again about european sovereign risk net of hedging?

Dr. No's picture

I believe morgan transferred all those risk assets to the parent, BOA. In that way, the losses would be dumped onto FDIC rather than the FED when BAC goes bankrupt in the near future.

EDIT: my error. I was thinking merrill lynch, not Morgan. BAC own Merrill.

azusgm's picture

No, Dr. No. That was Merrill.

Not to worry. It is hard to tell the fraudsters apart.

Dr. No's picture

Yes. I added edit note same time as you replied. Thanks for watching post accuracy.