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

Tyler Durden's picture

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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Popo's picture

On what planet is a 49% loss not a credit event?  


..(oh... apparently this one)

FunkyMonkeyBoy's picture

A fascist planet. Wake up, it's here, all as planned.

Popo's picture

Tyler,  can we please stop repeating the clever MSM propaganda word, "haircuts".  

This is in no way a "haircut".  

49% is complete and utter "dismemberment", with massive blood loss and a minimal chance of survival.  

"Haircut" my ass.   

Can anyone imagine using the word "Haircut" if the DOW tanked 49%?

"'Tis nothing but a flesh wound!"

Doode's picture

"If do not bail us out we will explode and take you with us!" Barcap sounds like terrorists - do we negotiate with those even if they are financial ones? Or are they just retards so we have to babysit them even though they wear suits and ties to work? Which one is it because I am furious if the bailouts continue long after all of those folks had an opportunity to get out/unwind their positions/learn things can blow up!!!!


This shit makes me really angry - it was ok/understandable in 2008 when things were not clear and sort of came out of nowhere, but this shit has been telegraphed for years - ever heard of Russian default. And this was stinkier and nastier. Arghghhghghghhghgh!!!



gojam's picture

Yes, I agree Popo.

It's more like a 'Brazilian' and I'm talking about the pubic trim not some historical South American default.

SheepDog-One's picture

Step right up! Free haircuts at the guillotine!

SheepDog-One's picture

But FMB still at the end of the day they cant squeeze blood from a bunch of turnips!

SheepDog-One's picture

So bankers rule over Fullretard Planet, then what? Theyll have no producers, no one knows how to do anything anymore...see what Im getting at? What does it get them?

CrimsonAvenger's picture

Oh, it'll all work itself out. We've gotten this far, haven't we?

SheepDog-One's picture

Well the Bolshevik Revolution also worked itself out a real horrible fashion for millions upon millions of people....but yea it worked out.

tmosley's picture

You misspelled "Eudopia".

gojam's picture

Have you been good this year ?

Dr. No's picture

IF there is one thing I have learned since 2008: Nothing is priced in.

qussl3's picture


People only panic when its too late, rare are those that leave the party early and be willing to be mocked by their peers.

Shvanztanz's picture

I'm usually mocked by my peers while I'm still at the party.

lunaticfringe's picture

It just never ends. Never have I seen such outlandish and ridiculous attempts to keep central bankers in power. It is a wonder to behold, like water running uphill. It will be a pyrrhic victory in the end.

ArkansasAngie's picture



Que me when I should start holding my breath.

I must be dense.  I cannot understand why bankruptcy is so fought against.

Insolvency is a state of being ... not of the mind.

SheepDog-One's picture

Yea yea everyones terrified, Im terrified, youre terrified....but the STAWKS refuse to be terrified in our 25 days non stop giggling continuous melt-up...and after all, stawks are all that matters here in Fullretard Ville.

Fips_OnTheSpot's picture

@ftbrusselsblog: A sign Wednesday's summit could fall short?
           ". << here we go. FT says pre summit Finmin meeting off

Corn1945's picture

So I assume Barclays owns a lot of Greek CDS and wants to get paid on them?

Irish66's picture

DAX positive...hum

danger close here's picture

Germany opposes a phrase in a draft conclusion for Wednesday's EU summit that calls for the European Central Bank to continue buying bonds in the secondary market, Chancellor Angela Merkel said on Tuesday, sending the euro lower.

GoldBricker's picture

Is 'analysis' now reduced to the point of guessing exactly which card in the house of cards will be the one that topples the structure?

If it's that much of a problem, governments could simply declare that henceforth their courts will enforce no derivative contracts. They cancelled gold contracts in 1933 in just this way.

  1. Screw things up
  2. Declare an emergency as a result of your own screw-up
  3. Do whatever it was you always wanted to do anyway
Tense INDIAN's picture

off topic but this is a nice one ...they are moving ahead with their PLOT

SheepDog-One's picture

The similarities are pretty eerie.

Odin's picture


Adbusters is not owned my "zionists"... pure paranoia...In fact, the have actually been accused of being anti-Semitic if you do the research... These OWS kids are just un-informed, disillusioned, and probably mostly jobless people who do not understand the root cause of their anguish. They are right to protest, but they do not know what specially to protest. They need leadership...

Use of Weapons's picture

...which is the last thing any popular movement needs.


They're working it out, trust me. Basic democracy is a bit slow.1


Btw, these kids are mostly Gen Y - means they were weaned on the intarweb, they're usually aware of the more out there conspiracy sites. What they lack is the 1970's paranoia & fear over RL political paramilitary groups - something that they might learn the hard way.

  • 1. If only there were an App for that
Problem Is's picture

Nice to link to some history... but again we have FullRetard as:

"dismantled the Russian Republic of Czar Nicholas."

Never Let Facts Get in the Way of Revisionist History
As the autocratic regime of Czar Nicholas was a looting oligarchy of hereditary lords just like his cousin King George of England and present Britain...

Hence, one can see this MI5, City of London disinformation slant "dismantled Russian Republic of Czar Nicholas"...

This revisionist fallacy of the false dichotomy is being spread to scare the sheeple away from even thinking of dethroning the banksters who currently rule the system and own you and me with their fractional reserve counterfeiting....

PAPA ROACH's picture

Europe better start loving the printing press....................sooner than later.

hbvyh's picture

time to's bullish!!!!

max2205's picture

TPTB are making sure no CDS trigger happens...even if they have to change the rules....

Saxxon's picture

You notice the language used repeatedly . . . 'terrified' of what might happen . . . the banks know who has what CDS, this is a bluff to frighten the sheep . . . Goebbels would have been proud.

The international banks are lampreys feeding on the healthy sector of the populace.

[Google a few photos of a lamprey and tell me otherwise!]

slaughterer's picture

Sell the news today, tomorrow it will be too late. 

SheepDog-One's picture

They got nothin! They stretched it out for a couple months with the carrot and stick rumors and cancelled meetings, now they have to show the numbers and it will impress no one. 

xPat's picture

I think it very likely that the EU governments will simply pass a law saying that this is not a credit event, and that CDS shall not be triggered. I'm not joking here. Consider that they recently proposed with a straight face to prohibit rating agencies, by law, from downgrading sovereign credit ratings.

The solution here (for them) is to take the big haircut, and declare as a matter of law that it's not a credit event. Yes, what I am saying is completely absurd. Fits, doesn't it?


ZeroPoint's picture

Bank of America is a foreign CDS writer. How can they stop bond holders from demanding their insurance payouts?

youngman's picture

"Give me your gold..or terrible things will happen"....we will soon hear this from the Bankers

SheepDog-One's picture

Exactly. And what would it really take? A speech from ZeroDamus about how he wishes he didnt have to, but just signed an Exec Order that youre a felon after the grace period 48 hours from now unless you hand over your gold to 'save the country'...its not a stretch.

ZeroPoint's picture

And what's worse is that order won't be applied equally. They will raid precious metal IRAs and bank safety deposit boxes.

Wealthy people holding offshore will get a pass.



ZeroPoint's picture

So let's get this strait. The ECB does not have the money to backstop the increases in the ESEF fund, and yet the can't allow a credit event to seize the markets.


They are going to print or they are going to rob the plebs. Either way, the plebs are screwed.

SheepDog-One's picture

Yep, and even if they go all-out retard printfest...then what? They still got nothin.

drivenZ's picture

right, so theyll take a 20-30% haircut and throw a bunch of other measures on top that will last them another 6 months. sounds about right to me. world collapse will have to wait. 


don't know who junked me, but this is what happens. Those people that think the collapse is coming next week or the week after are mistaken. Remember the debt ceiling debate? back in May? now 6 months later we're hearing talk that the super commitee may not get everything done and of course they dont make the reforms or have any authority to do so. So any reccomendations they have would probably keep being stretched out. Mandatory cuts dont take effect until 2013, so keep on waiting. 


Johnny Lawrence's picture the banks might actually have to take a loss?  Did hell freeze over?

buzzsaw99's picture

nice to have such a huge gaping gray area built into the contract so the issuer can weasel out of having to pay.

Johnny Lawrence's picture

If I recall correctly, the ECB is THE largest holder out Greek bonds.

Problem Is's picture

"in particular on the potential trigger of a bank run in Greek institutions and the scope for contagion to other EMU countries."

The Bernanke Has The Answer
Bald Bennie has the answer on the worry over depositor withdrawals and bank runs...

0% Required Reserve Ratio...

Ahhhhhh, The Bernank is a "brilliant" PhD Economist from one of the "right" schools, of course...