Farce Is Complete As ISDA Finds 50% "Haircut" Is Not A Credit Event

Tyler Durden's picture

And, as expected, here is ISDA with the most farcical of decisions. From Reuters: "A new voluntary deal for holders of Greek debt to accept deeper losses is unlikely to trigger a 'credit event' that would cause a payout on default insurance, said a top lawyer at the International Swaps and Derivatives Association. Greek bondholders face losses of 50 percent under a plan to lower the country's debt burden and contain the euro zone's long-running debt crisis. The aim is to complete negotiations on the package by the end of the year. But because participation in the deal is voluntary rather than forced, it would typically not trigger payment on CDS contracts. "As far we can see it's still a voluntary arrangement and therefore we are in the same position as we were with the 21 percent when that was agreed," said David Geen, general counsel at derivatives body ISDA, referring to an original deal proposed in July that involved smaller bondholder losses. "The percentage (of losses), as far as the analysis for CDS purposes goes, doesn't change things. typically a voluntary arrangement won't trigger the CDS." Geen said the final decision on whether a credit event has occurred rested with the ISDA determinations committee, which would consider the issue when requested to do so by a CDS market participant." The fact that the decision is "voluntary" under duress from an entire political system which realizes its ponzi structure is collapsing is seemingly irrelevant. Luckily, the market is not all that stupid and the preliminary reaction is as expected, and to paraphrase Willem Buiter, "Failure to trigger Greek sovereign CDS when economic logic indicates this ought to occur would likely be detrimental to financial stability." But that's irrelevant. The EU has kicked the can down the road. Now it is literally a race for the fade to discover who is first to realize that as Zero Hedge and now RBS chimes in, "the EFSF is still too small to restore investor confidence."

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bigwavedave's picture

Green bitchez. Bwahahahaha

paarsons's picture


It may seem like a joke.  But it's a start.

How much of a haircut did Goldman have to take?

Angie Merkal has balls.

Let's see where this leads before we shit on her head.


Motley Fool's picture

The Farce is strong with this one.

Comay Mierda's picture

what the hell is taking the greeks so long to realize they just got royally PHUCKED?

WonderDawg's picture

Pretty amazing PR campaign to make this a market positive. Weeks and months of no solution, then suddenly, "We Have A Deal!" and everyone cheers. Had it been something like weeks and months of no solution and then "Greek Bondholders Forced to Accept 50% Losses!" maybe the market reacts differently.

I think this will be the last pop to this rally. The ripple effects are yet to be felt, and when the hopium wears off, we get the next leg down, and it will be a doozy. It will be interesting to see just how much higher the markets will rise, and for how long. My bet is this initial pop will be most of the rise and it buys maybe another two weeks before the markets roll over. But that's just me. I got off the hopium a couple of years ago.

techperson's picture

Probably the fact that they were just forgiven 50% of their government debt. Sweet!

jm's picture

The only way this determination was made was if dealers were in on the joke and had a short basis trade on.   

None of these guys lost a $%#@ dime.  Except guess who.


Harlequin001's picture

Well, according to an earlier post the only losers are the Greek pension funds, and I have no problem whatsoever with that...

Now let's see how long these pension funds take to refuse to eat this 50% loss unless everyone else does or at least takes some, and throw the whole lot into turmoil again. Until we then have an actual default...

Either that or I can see one or two Greek pension fund managers running around in fear of their lives...

nedwardkelly's picture

Yeah is this a case of the politicians getting together and agreeing that all the bondholders will 'voluntarily' agree to the haircut, without having actually had any of the bondholders voluntarily agree to anything? I really can't imagine that did a poll of anyone that holds greek debt to find out how they all felt about it...

Also, aren't we talking major moral hazard here now? If you're portugal, or Italy or Ireland, Spain etc... Wouldn't you be sitting up saying "Party on wayne, if our debt gets out of control we'll just get everyone to volunteer to cut it in half!!". For that matter, who the FFFFFF would buy EU government debt now?!

jm's picture

What I don't get is that the same people that want EU banks to boost tier 1 capital by <who knows how much in euro terms> are the same people that seem instrumental in destroying their hedge book.  Much more, they have introduced huge moral hazard into all european government debt.

This is more than stupid. More than "Trichet stupid".  This is stupid on a whole new level.

nedwardkelly's picture

How much of a haircut did Goldman have to take?

I'm just not following...

Supposedly it's voluntary. Why would anyone that holds the bonds, plus CDS, volunteer on a 50% haircut with no credit event? I could see why someone without insurance might volunteer for the haircut (vs complete default) but even that's a stretch.

The 'volunteer' aspect of it all just doesn't seem to make any sense. Or is this similar to the way we all volunteer to have our balls groped when going through airport security?

Translational Lift's picture

ISDA  Sorry....you don't get to trigger the default until there is a 99.9% loss.....NEW RULE!!  Sucks to be you!!

Al Gorerhythm's picture

Insurers denied home owners in Australia flood damage payouts, because the damage was caused by rising waters downstream, not from torrential rainfall in their area.

Insurance is a gyp. They make the rules up on the fly to suit their bottom line. In this case it seems that the banks will take a 50% haircut on their bonds and be paid for the losses by the ESSF, that prints the money and taxes the masses through inflationary dilution.

What I don't get; where does a group of bankrupt nations get the money to pay themselves. If euros don't emanate from the ECB, then where do they come from? Tokens in a cornflakes box?

taxi952's picture

Your beeing a little hard on those poor girls

bloons tower defense 5

Mongo's picture

Because voluntary has been redefined as mandatory

HD's picture

The difference between sex and rape...

What does it all mean's picture

Is it truly "mandatory"?  I mean... If I am a bond holder and I don't tender, do I get my coupon and principal. 

A question of procedure.

Translational Lift's picture

"I mean... If I am a bond holder and I don't tender, do I get my coupon and principal."

Ask Obummer and see what he says!

Iam_Silverman's picture

"If I am a bond holder and I don't tender, do I get my coupon and principal. "?

That is a good question.  Consider though that the banks willingly taking a 50% haircut have now just set the new market value for the bonds you hold.  No problem if you are a bank - just mark to model (holding to maturity and being made whole).  Not so good if your portfolio has to mark-to-market.

Also, since the bank holders of the Greek bonds voluntarily took the haircut (so they can get cash infusions from the EFSF), the CDS covering those bonds have not been triggered.  Truly buggered, those who are holding Greek bonds and not a European banking institution!

Fips_OnTheSpot's picture

Hilarious - so who buys EFSF-CDS in such environments then?

Ghordius's picture

nobody with two brain cells

BAN CDS (Again)

Fips_OnTheSpot's picture

Oh right.. CDS are evil and banned. Dummy I am.. thanks for pointing that out. Now pass it to Merkozy :)

Ghordius's picture

Oh, right, what a nonsense, MegaBanks work in your interest by improving on the economy with exciting financial innovations.

Your sarcasm is reaching for some target I simply don't see, explain, please...

meanwhile BAN CDS, not only naked CDS, just for starters...

magpie's picture


But who could survive the "true" rates of interest.

Harlequin001's picture

you mean the ones where I get a reasonable rate for the risk of lending my money?

Calmyourself's picture

I said it yesterday.  No law will be followed civil, contractual or criminal.  No national custom or sovreignity will be allowed to stand in the way of this ponzi the only trigger is hunger, trade and prepare accordingly. 

Fips_OnTheSpot's picture

Sorry.. well: They ban CDS (naked for now) - but "invent" EFSF-CDS at the same time. Wasnt clear or '</sarc>' clearly. *picking my nose*

agent default's picture

So... Buy  government debt and face a potential 50% capital loss WITHOUT the possibility of hedging against it.  Government bond sell off imminent.

MsCreant's picture

"Remember that insurance policy you bought? Well we are ruling that you are not allowed to collect on it. We pick the winners and losers any time we like because we are your government. Thanks for playing though. Tee hee."

Put these people in children's clothes and let them play board games with each other, they are a menace for the rest of us.

agent default's picture

These spoiled brats just make the situation for Italy and Spain much worse.  They are essentially legitimizing capital loss with no means of protection, and then they will turn around and whine when spreads begin to widen like crazy.  Government bonds were considered a safe haven in times of uncertainty.  This decision just makes them risk asset number one.  Lets face it, you have to be an extremely crappy stock/commodity picker to suffer a 50% loss with no possibility of recovery.  At this point bonds have almost the same risk as derivatives trading.

GeneMarchbanks's picture

'They are essentially legitimizing capital loss with no means of protection, and then they will turn around and whine when spreads begin to widen like crazy.'



HD's picture

Of course it isn't a default. That would have been bad. Bad is not good. Only good can happen...and happen it has. Hopium is powerful stuff.

spz_trader's picture

I am surprised they wer able to levitate at these levels with the EFSF woefully inadequate. 

Cognitive Dissonance's picture

Abiogenic government debt. It naturally refills the coffers......which explains that constant sucking sound.


Ghordius's picture

"the EFSF is still too small to restore investor confidence"

the blasted EFSF is just there so that the EUR can continue to be the second ugliest currency in the contest

if the structure of the EFSF is of ugliness, it's mainly because it's modeled after the MegaBanks and holds them a mirror...