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CMA Now Officially Assumes 20% Recovery In Greek Default - Time To Change Sovereign Debt Risk Management Defaults?

Tyler Durden's picture




 

One of the ironclad assumptions in CDS trading was that recovery assumptions, especially on sovereign bonds, would be 40% of par come hell or high water. This key variable, which drives various other downstream implied data points, was never really touched as most i) had never really experienced a freefall sovereign default and ii) 40% recovery on sovereign bonds seemed more than fair. Obviously with Greek bonds already trading in the 20s this assumption was substantially challenged, although the methodology for all intents and purposes remained at 40%. No more - according to CMA, the default recovery on Greece is now 20%. So how long before both this number is adjusted, before recovery assumptions for all sovereigns are adjusted lower, and before all existing risk model have to be scrapped and redone with this new assumption which would impact how trillions in cash is allocated across the board. Of course, none of this will happen - after all what happens in Greece stays in Greece. In fact since America can decouple from the outside world, it now also appears that Greece can decouple from within the Eurozone, even though it has to be in the eurozone for there to be a Eurozone. We may go as suggesting that the word of the year 2012 will be "decoupling", even though as everyone knows, decoupling does not exist: thank you 60 years of globalization, $100 trillion in cross-held debt, and a $1 quadrillion interlinked derivatives framework.

As GGB cheapest-to-deliver bonds already trade sub-20

Source: Bloomberg

 

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Thu, 01/05/2012 - 16:21 | 2036626 redpill
redpill's picture

Still 20% higher than it'll turn out to be.

Thu, 01/05/2012 - 16:42 | 2036720 kaiserhoff
kaiserhoff's picture

But is that before or after legal costs and taxes?

Thu, 01/05/2012 - 17:27 | 2036972 Tijuana Donkey Show
Tijuana Donkey Show's picture

And old or new euros?

Thu, 01/05/2012 - 16:59 | 2036804 HardlyZero
HardlyZero's picture

If we wait a few more months the recovery will be zip.  And then Greece will setup the funding from last year's bailout.  Someone will scoop up the cheap Greek bonds and make a killing (hey, didn't the Rothschilds do that after the Battle of Waterloo ?)

Thu, 01/05/2012 - 19:22 | 2037414 Buck Johnson
Buck Johnson's picture

No kidding, they are all playing a game of make believe and hoping that something comes up that can bailout all of them.

Thu, 01/05/2012 - 16:21 | 2036628 Gubbmint Cheese
Gubbmint Cheese's picture

I'm confused.. is the CMA saying here is a 20% chance of a recovery in Greece, or are they saying there is a 20% chance of default? This is very bullish right?

 

Thu, 01/05/2012 - 16:23 | 2036631 mayhem_korner
mayhem_korner's picture

 

 

They're saying 20 cents on the dollar is what bag...er...bondholders will get.

Thu, 01/05/2012 - 16:24 | 2036643 redpill
redpill's picture

Will our new consumer protection czar Richard Cordray protect US bond investors?

Thu, 01/05/2012 - 16:25 | 2036646 Ahmeexnal
Ahmeexnal's picture

So it's a "voluntary" 80% haircut....and still not a credit event trigger?

Thu, 01/05/2012 - 16:26 | 2036649 Ancona
Ancona's picture

That's not a haircut.....that's a head shave!

Thu, 01/05/2012 - 16:30 | 2036663 Divided States ...
Divided States of America's picture

You kidding me, that's almost the whole head from the top down to the forelip....we can keep the goatee in case the 20% needs to be further reduced.

Thu, 01/05/2012 - 16:40 | 2036707 candyman
candyman's picture

or a comb over

Thu, 01/05/2012 - 16:30 | 2036664 Ahmeexnal
Ahmeexnal's picture

More like a scalping!

Thu, 01/05/2012 - 16:31 | 2036667 Financial_Guard...
Financial_Guardian_Angel's picture

More like a decapitation!

Thu, 01/05/2012 - 16:45 | 2036726 Sofa King
Sofa King's picture

Under the double secret world financial sustainability compact, the term "credit event trigger" has not been defined and therfore can not happen making any insurace sold extreamly lucrative for the seller yet completely worthless for the purchaser.  You would be better off buying a Reverse Morgtage from Robert Wagner.

Thu, 01/05/2012 - 16:33 | 2036676 Everybodys All ...
Everybodys All American's picture

even though most banks record show 100%

Thu, 01/05/2012 - 17:28 | 2036974 agent default
agent default's picture

The CMA is way too optimistic.  The way Greece and the rest of the periphery is going you will be lucky to get half that.

Thu, 01/05/2012 - 16:25 | 2036645 kito
kito's picture

everything is bullish....everything............

Thu, 01/05/2012 - 16:22 | 2036629 mayhem_korner
mayhem_korner's picture

 

 

What do they think will be the recovery rate on Greek CDS's?

Thu, 01/05/2012 - 16:23 | 2036635 Irish66
Irish66's picture

So EK bond holders will get 24, Greek will get 20

Thu, 01/05/2012 - 16:24 | 2036637 GeneMarchbanks
GeneMarchbanks's picture

Once the recovery estimates are that low why not just completely default 100%?

Thu, 01/05/2012 - 16:26 | 2036648 mayhem_korner
mayhem_korner's picture

 

 

And what would all the 'journalists' do if they printed the truth on Day 1?  Please have some compassion for the light-minded.

Thu, 01/05/2012 - 17:06 | 2036837 HardlyZero
HardlyZero's picture

The Journalists can't handle the truth...if they did, they end up like those in Russia.  Cold.  No exit.

Thu, 01/05/2012 - 17:08 | 2036845 HardlyZero
HardlyZero's picture

Don't disturb the intricate and delicate House of Cards.

In a few months everything will be arranged...by lets say The Ides of March.

Thu, 01/05/2012 - 16:25 | 2036641 Non Passaran
Non Passaran's picture

BAC up close to 8% on a positive ZH post on Greece...

Now I understand why they call them zombie sovereigns - for all practical purposes they're as good as dead, but they can't really die...

 

Thu, 01/05/2012 - 17:04 | 2036825 HardlyZero
HardlyZero's picture

BAC went in recently for their liquidity injections.

The stress test is next week...silly !

Didn't you get the memo ?

Thu, 01/05/2012 - 16:28 | 2036652 JW n FL
JW n FL's picture

 

 

Biderman's Daily Edge 1/3/2012: Why No President Can Change Our Economic Woes

http://www.youtube.com/watch?v=wS2TF5ziWog&feature=uploademail

Thu, 01/05/2012 - 16:29 | 2036660 gookempucky
gookempucky's picture

sounds like MFG clients

Thu, 01/05/2012 - 16:31 | 2036666 Irish66
Irish66's picture

How does this not trigger a credit event and how much money are we talking about?

Thu, 01/05/2012 - 16:32 | 2036674 hugovanderbubble
hugovanderbubble's picture

CMA doesnt know that Greece devaluation into Drachma will turn the RR into 5%

Thu, 01/05/2012 - 16:34 | 2036683 GeneMarchbanks
GeneMarchbanks's picture

Precisely.

Thu, 01/05/2012 - 16:33 | 2036675 Manthong
Manthong's picture

"as everyone knows, decoupling does not exist"

I don't know about that..

Ethics, morality and veracity seem to be entirely decoupled from the financial markets.

Thu, 01/05/2012 - 16:55 | 2036780 slewie the pi-rat
slewie the pi-rat's picture

model railroaders are aghast!

Thu, 01/05/2012 - 16:44 | 2036725 ffart
ffart's picture

So at what point do I start buying Greek bonds?

Thu, 01/05/2012 - 16:47 | 2036740 Piranhanoia
Piranhanoia's picture

"Who gets the 20 and who gets the 80?"   I want to know before I sign.

Thu, 01/05/2012 - 16:49 | 2036751 Jlmadyson
Jlmadyson's picture

Not a credit event. Mwhahahaha

Thu, 01/05/2012 - 17:11 | 2036870 Poetic injustice
Poetic injustice's picture

See, by new definition it is not default as long as you get something.

Thu, 01/05/2012 - 21:28 | 2037687 smiler03
smiler03's picture

1 cent on the € !! Nice terms if the borrower can get that ;O)

Thu, 01/05/2012 - 16:55 | 2036781 HardlyZero
HardlyZero's picture

With limited resources the only solution is MUTEX, each then gets access to the resource one at a time.  So now each local government can become mutually exclusive of the global governments.  This will form a partition and the local vichy governments will have to locally survive on whatever their local economy produces. 

Wine country looks good right about now, or Loretto, Kentucky.

or if you are not married ... Vegas.

Thu, 01/05/2012 - 17:00 | 2036808 bankofvol
bankofvol's picture

If you to know why people use 40% recovery rate for Corproration, and 20% for Financial Sub, ask NYU Stern Professor Edward Altaman, well it is just becasue he told them to do so. And wehen you ask him his answer is why not.

Thu, 01/05/2012 - 17:00 | 2036809 The Reich
Thu, 01/05/2012 - 17:04 | 2036822 bankofvol
bankofvol's picture

By the way do not forget that ITRAX and DOwJones CDX are priced with 40% recovery rate as input in the pricer

Thu, 01/05/2012 - 17:20 | 2036930 PORTA PORTA
PORTA PORTA's picture

Have you seen the PSI Letter to Investors??

http://www.scribd.com/doc/76950350/Letter-to-Govs-PSI-26082011-Mpenny-Fi...

any comments ??

 

PP

 

 

Thu, 01/05/2012 - 21:31 | 2037697 smiler03
smiler03's picture

It's an impressive document but why not just shorten it to "whistle for it"?

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