Credit Event Or No Credit Event, This Will Get Messy

Tyler Durden's picture

We have noted again and again that the seemingly single-minded effort to avoid a credit-event or involuntary restructuring is yet another one of the actions of an ignorant and ill-informed elite who simply do not understand the unintended consequences of any and everything they do to calm a desperate banking system. Today saw Willem Buiter, of Citigroup, agree with our perspective in terms of both the realistic lack of impact from a CDS event on Greece (per se) and moreover his perspective that the lack of a credit event could throw bond markets into a chaotic state as seemingly worthless CDS contracts and CTD bonds are tossed like hot potatoes from one smart banker to another smart hedge fund.

The Greek 5Y CDS-Cash basis until last week - expect volatility to explode in this relatively calm position.


He notes:

Not triggering CDS in a deep Greek sovereign debt restructuring would likely be more damaging than triggering


In that case, the value of CDS as an asset class – which retains a significant hedging and risk management role – would be much impaired

The lengthy Citigroup prose is summarized rather simply as avoiding the trigger when it is obviously a trigger-worthy event (using our vernacular) could cause far more trouble than any they are seeking to avoid for fear of contagion and losses. Peter Tchir, of TF Market Advisors,  added this evening:

Given the number of European Leaders who are still up and making statements, it would seem we finally have a deal.  Either that or they were all clubbing together, which can't be completely ruled out.


50% haircut for banks.  Will the banks actually be forgiving Greece 50% of their obligations or are the banks about to get some super cool security that has lots of bells and whistles, so they can say it is a 50% write-down?  I'm betting the latter, which just means EFSF funds get used up more quickly.


This will NOT be a Credit Event.  As I sent earlier, it doesn't fit the legal definition of Credit Event in the ISDA documentation.  I would expect the "basis" to go out of control, as banks sell useless CDS hedges.  I am not sure what the immediate impact on the broader sovereign bond market will be.  It may try to react positively to the "deal" and the CDS tightening, but I would be careful as sophisticated banks will be busy selling their bonds now too.  The "dumb" banks will probably try and sell as much sovereign CDS as they can and cut bond exposures in other countries, because this is now the best risk-free asset on the planet :)  The CDS does remain outstanding, so it doesn't go away if it doesn't trigger.


It will be interesting to see who participates in the "haircut"   Will all the banks really participate?  Will the ECB's bonds be included?  Will bonds held by Greek pension plans?  What about bonds held by hedge funds?  I would assume anyone who manages to keep some old bonds should see an increase in value (if the haircuts are real, and not just a symbolic calculation).  Who gets forced into participating will create precedents that may have some serious impact on the market.


The new capital injection calculation of just over 100 billion EUR seems low.


The idea of austerity in Portugal will likely be thrown out the window.  Going to be hard to suck up and swallow austerity when your buddy down the road just got some debt taken off the books.


Italy will have to play nice so it can get some of the leveraged EFSF money - which is as likely to just cannibalize the straight debt as anything else.


The rating agencies will finally have some real numbers to play with as it seems details have to be getting close.  I don't think their reactions will be particularly positive - as it does nothing to fix problems at the weak countries, and drags France and Germany into the morass.


It should be an interesting morning, and about the only thing I am truly certain of, is I would not want to be long the basis package if I worked at one of the institutions that agreed to the IIF deal (assuming it is a real deal and actually has real haircuts).  I would love to see the look on the faces of some EU ministers when they realize that hedge funds are probably the largest beneficiary of their blatant manipulation of the Greek CDS market.


If they ever get around to creating the EFSF, I would read the fine print very very very closely.

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AbelCatalyst's picture

Um, anyone know why the futures are melting up? Did I miss a memo?? F'ing bizarro world: default is NOT a credit event and it's super bullish?? What the f$&@( is going on here???

JLee2027's picture

Everything is bullish to robots.

Harlequin001's picture

Going short is easy; collecting on it is a different matter...

Western's picture

So are "they" refusing to trigger this credit event because as it turns out the hot potato was in France's hands when all this started going down down, and now they're busy trying to stall the game and pass it on to someone else? Who can possibly be interested?

qussl3's picture

I think its more about the optics.

The EZ cant have a member default otherwise it's not different from argentina, russia.... etc

Even the retards up top know its far more expensive to do it this way, but as long as they dont go cap in hand to the supranational lenders the IMF, they will always be able to pass the costs onto to either the serfs or the external buyers.

The key is maintain control of the supra national entity like the IMF, world bank...etc

Better known as the global bankers.

This is why the BRICs dont want to play ball until they get to call the shots there.

The deputy director concession was already a major loss for the west.

CrazyCooter's picture

Folks, this is already a primo scam. Roll with me here ...

ISDA gets to call "default" or "no default". When you see news that 50% isn't a default, you should really stop and think about that. Just for a second.

ISDA will throw the CDS market into a panic with uncertainty. Insiders, who know the final call (which may not be known until the right-turn-clyde can be valued against the left-turn-clyde) will accumulate winning positions in the chaos, likely at sub-par prices. This is betting against the house in a casino, your odds are sub-par, so if you don't get fucked, most others will in general terms.

Then ISDA will pull the trigger, like a big game hunter passing on buck after buck waiting for the right rack to shoot his ... ahem ... load.

You are all fools for even participating in this game. Pack it into PMs or refund your OPM and have some credibility left.

We US citizens are fools for having bank regulators who will back it with our deposits so we can pay to replace the funds.

Can't we just skip to the hangings? This shit show makes me angry. I need my catharsis.



P.S. Late to the thread. I needed to rant. I will read now and then go to bed...

Hephasteus's picture

I spent the weeks of last summer or maybe it was the summer before that rummaging through the ISDN.

All I got out of it is a bunch of worthless lawyers without any adult supervision.

Eurodollar's picture

ehhem, even if most people in here seem to be doom mongers it should be allowed once in a while to think. EU has taken steps to actually agree on something. It isn't small stuff either. Sure, there will be challenges ahead, and this may be a CDS trigger or not (Maybe ZH can run a post on the players and how they will vote on such a decision). The main point of the night: EU can agree on something! They have shown leadership and ability for once. That bodes well for the future. I am sorry to say, but believing the market would take this negatively in my not so humble opinion is naive at best.

qussl3's picture

The mentality you describe is precisely why we get long periods of calm then abrupt major panics.

The problem is that the calm periods are getting progressively shorter, simply because the same tricks are becoming more and more transparent.

It's not a matter of IF but WHEN this blows up.

It would have been much easier if we just allowed markets to clear, and the bad actors take their losses.

Now we have massive misallocations of resources because the pricing mechanism is completely fucked.

Although it is very likely the media apparatus can keep the masses placated and credulous in perpetuity, our complex energy limited societies cannot outrun the missallocation of capital forever.

This will blow and it will be very messy, i just hope it stays conventional and not in my fucking backyard,

Eurodollar's picture

I also have a strong feeling it is just a matter of when. Personally I am in a position where I am building a war chest for investing through my own business and I am grinding through finance studies and taking asset valuation courses from an investor who has had excellent results over many years. For this I am happy we are not getting the implosion now :) When it finally does arrive I will be ready!

That said; there are simply to many ways that lead to a epic FAIL. A sneeze in China can be enough to send the Union spiralling down the toilet.

Feeding the bayes theorem motor with the latest input, I think it is fair to say that "When" now will be further into the future than most people on here believe. I am fully aware of the trigger/downgrade issues that potentially could reverse this, but one can't overlook that the EU leaders have shown they are able to take steps to solve what by their perception of reality is thrown at them to a certain degree. They are the ultimate can kickers, and they will probably be able to retain the Heavy Weight Can Kicking belt for a long time unless there is some external factor that gets in the way. This is good news for us all in a way. We live to buy one more thing. Less austerity yet, and we get to position us well for when the fan gets full of shit as it always does and always will

These are just the two cents of a pollen in a very very large ocean. I really love the posts on this site, but feel the negativity might take over a little bit too much :)

qussl3's picture

I'm in broad agreement with you for the most part and concur that it can get too negative here, the articles are still great tho :)

But im not too sure about the half life of this particular can kick. I dont think we will see new highs before we test the recent lows.

That said, the next implosion will not be the "big one".

That is likely awhile off - when oil is 250 and water gets expensive, particularly in China.

I think ZH really has the most value to those who can avoid the cardinal sin of investing - losing your money instead of your opinion.

With liquidity the prime factor in markets, how do you reconcile its effects regarding valuation?

Isnt it just simpler to just buy when the pump is primed and sell when it takes a breather?

Eurodollar's picture

I agree, the posts/articles on ZH are a much welcome reality check from the pump, dump and re-pump manipulative mass media. I used to tear my hair trying to see through the bullshit. ZH has been a revelation in that regard. I just urge the posters to not fall for the commercial trap that is feeding the comment-monsters what they overall seem to crave: "negativity". There are a lot of positives in this world of ours too. We are just too busy being busy and too pumped, dumped and re-pumped to notice :)


I am obviously far from an expert  and I guess I haven't really earned the right to an opinion to take notice of. That said, I do of course have one :) I also believe all the can kicking experts will be able to keep the obvious-for-all-to see-at-some-point-to-crash social ponzi scheme up for quite some time, come what may. We have lots of emerging economies with a lot of debt potential to ruin before we get to the end game of this one. Imo we will see severe volatility, we will see oil and other need-to-function commodity prices surge and I am fairly sure we will see a certain degree of inflation (allthough I theoretically can see a case for deflation acceleration too given the right circumstances).


I agree on the liquidity issue. It keeps the markets together. It makes pricing stocks very difficult for a novice like me as you can never really be sure of the model input and you can most definately trust your uncle market to deliver the result you want within the time frame you expect no matter how much value you believe you found. That said; i still believe in paying less than 80 cents on the dollar so at the I look for value stocks where I also feel the short term demand will be high, where the business has a solid current ratio and a even more solid interest cover ratio. This way I hope the ralleys will bring immidiate wealth to my pockets. I obviously also take notice of which, if any commodities it uses in its production as these costs can run away quickly and not be sent onwards to an already pressured consumer. I also will buy more into useful commodities that will always be in demand when volatility allows. Trading as per se I will not touch. Fighting the machines who trade into the future does not really strike me as a good idea. At least as of now. I simply don't have the skill.


Again, just the two cents of a plankton. Handle with pretty much every concern on the planet!

Catequil's picture

if they keep up deciding like this, it won't be long until EU is in no position to decide anything whatsoever simply because it won't exist. CDS event or not, the moral hazard has been instituted last night.

Being an EU citizen and a taxpayer I want my country out of EU, as it appears to be a system awarding wreckless greed (banksters) and laziness (greeks).

johngaltfla's picture

Becoming Zimbabwe is bullish.

kito's picture

thank you tyler for some clarification on the consequences of a "non trigger" trigger...

truly yours,

ignorant and ill-informed non elite

winter is coming's picture

buy buy joke.... even if we start todrop, youll get out with aprofit

Hopium Dealer's picture

You must have a high-level job at a major French bank.

winter is coming's picture

more like seen major drop in my december and january puts... time to hedge i guess

Mactheknife's picture

Who, in their right mind, would ever again loan any of these people money? Guess that just leaves the Bernank.

qussl3's picture

Most idiot pension and insurance managers most likely.

Idiots with OPM.

SWRichmond's picture

seemingly worthless CDS contracts

Obummer and that f*** Ratner rendered 150 years of bankruptcy precedence worthless by telling the Senior Secured Bondholders to take a flying leap.  Why should EU CDS contracts be any different?

All government is good for is lying, stealing, killing, and destroying that which the free enterprise system creates.


CrazyCooter's picture


This is the HEART of the entire matter and people should make sure they understand exactly what SWR said. If you don't and you are in this market, you have an ass/colon like the CA/T, you just don't know it yet.



Kina's picture

Sorry, half your house burning down is not an Insurance event.

CrazyCooter's picture

Bzzzzzt. Insurance is regulated.

Oh, you meant CDS. Ding-Ding-Ding we have a winna!



tekhneek's picture
This Will Get Messy

I concur.

slewie the pi-rat's picture

i'll third that, t_k!

mr market will not be mocked forever, imo

i just finished my popcorn.  time for some greek yogurt?

hambone's picture

Mr. Market is in a deep, deep coma since March '09...don't look for any organic response there.

CrazyCooter's picture

Mr. Market will not be showing up until this entire house of cards burns all the way down the ground.

I would like, if I may, to coin the phrase "Serling Markets" ... close enough to sterling to lure in the wishful ... besides, Rod has to be hanging out explaining this show to the audience we can't see so they know exactly what is going down.

Feel like that?



dr.charlemagne's picture

ok. so my nov 126 spy puts? toast or golden?

winning's picture

they know nothing, NOTHING!!!!!

HD's picture

Now where have I heard that before...

merchantratereview's picture

So do I short or long the EURO????????????

Aguadulce's picture

Just buy phys gold and silver. They can be whatever fiat you want them to be.

Kina's picture

Under $2000 gold is strarting to look cheap.

surf0766's picture

This is the best site on the web.

AndrewJackson's picture

Does anyone else think that this aggreenment has just given the green light to contagion? Like TD said earlier, what incentives do the other countries have to tighten their belts if bad behavior implies debt reductions? I would bet on "As greece goes, so goes the rest of the pigs". I am with qussl3, this is Bear Sterns.

Aguadulce's picture

Oink oink muthafucka!. Are the PIIGS now just the PIIS?

wandstrasse's picture

hey, there has NEVER BEEN ANY incentive to tighten the belts, for NO country. The debt fiat system FORCES everyone to INCREASE debt, and averts the opposite.

chump666's picture

i don't think anyone knows what the F-is going on.  I'll wtach 5yr CDS on Greek bonds, closely watch Italian bonds and see if the bund/PIIGS spread starts to tick up. 

I agree that if the CDS market starts to trade with 0 value, the markets may set some kind of 'event' in motion.


qussl3's picture

Nobody is buying BS debt if they cant hedge it if necessary.

Not even with an insurance backstop of 20%.

Oh, i forgot that backstop doesnt exist yet, cos it hasnt been worked out.

Even better, the funding for the backstop comes from the same debtors whose debt its supposed to backstop.

I guess if i chase my tail long enough ill finally catch it.


chump666's picture

That's a good point, also I think people will short  (European) CDS's outside of EZ markets, if they going zero worth. A bidless trade  I'd also watch for the liquidity squeeze in Europe as their sovereign trade/debt markets  look like they will be put to death.

Harlequin001's picture

So who's going to take the other side of that trade now then?

chump666's picture

Sarkozy hahahaha

Just in time when S&P downgrades France.  Morons. 

qussl3's picture

I beginning to wonder how the hell France can possibly maintain its AAA, the economy is slowing, they are going to be taking more debt to fund the EFSF, plus they will need to backstop their banks regardless of the BS they are now spewing about private capital.

France has alot of new bills to pay and only more debt to pay it with.

Furthermore, this idiot game of keeping the EUR strong to give the impression of a stable store of value is going to kill EZ exports to the states.

They've pretty much used all their bullets here, they've open even france and german bond mkts to contagion with this crap.

If any of the other PIIGS comes hat in hand it is over.

This really is bear, where they could have stopped the shit from flowing but now they've bet the bus on AIG, and hoping there wont be a lehmann.

Unfortunately, the Italians have already shown how credible they are with that BS pension reform plan, not to mention Spain's shitshow with the hidden debts, or the strangely silent Portugese.


wandstrasse's picture

retail banks will soon offer CDS pieces: 'Serious banking for you and me', 'High finance for low budget', 'invest like a statesman'....

eatthebanksters's picture

synthetic CDO's made up of worthless CDS'?   Just substitute the CDS for the old mortgage backed security...billions, trillions!!!