Tyler Durden's picture

For those who have not been following, ISDA has released their updated Q&A on whether a 'voluntary' gun-to-my-head haircut of 50% is not a credit event. Nothing really new here but it clarifies much of what we have said with regard to their 'determinations' process and how they will defend their decision against a lot of very upset basis traders (who by the way were most supportive of both new issues and secondaries in the European sovereign market  - well until now that is).

Update on Greek Q and a 27 10 11

and more detailed perspective from Peter Tchir of TF Market Advisors:

We have been saying and continue to say that being short sovereigns via CDS is a bad idea.  The governments are trying to structure deals specifically to avoid triggering CDS.  Banks that have been using CDS to hedge will want to reduce their CDS shorts - because the banks that are hedging do it for economic reasons, not just for regulatory capital reasons.

I don't see any way that this is a Credit Event.  At this stage, the IIF still has to draft a proposal and sent it to its members who can accept or reject it.  In the end it doesn't matter whether they are forced to agree to a restructuring or not. That isn't what is meant or picked up by "voluntary" in the ISDA definitions.  The definition is meant to pick up the case where someone votes No to a change, but because enough other people vote in favor, that their bonds also get converted (say a 95% vote is required, and 96% is reached, then the bond converts, and the voluntary is meant to protect the 4% who didn't vote in favor but are forced to convert anyways).  We keep looking at the definition and don't think there is a strong case to say this was a Credit Event.

You also have the issue that under SNAC trades, you agree to be bound by the Credit Event Determination Committee.  So not only would you need to fight whether or not the Committee was correct, you would probably have to win an argument that you weren't bound to their decision even if they were incorrect.  In the old days, you would claim a Credit Event occurred, and send your Credit Event Notices to whoever had sold you protection.  If they disagreed, then you could sue them.  I am told the fact that you have agreed to be bound by the decisions of the Credit Event Determination Committee makes it harder than ever to suit.

Obviously these things can be challenged (and someone may well challenge them), but I don't think it is a particularly strong case.  In any event, doesn't seem like an exchange will occur before the Dec 20th contract rolls off.

At some point, someone might say something that could trigger a Repudiation/Moratorium extension.  I think it would have to be someone from Greece, and they have been very careful about saying anything potentially negative.  I'm not sure that Juncker would count as a "Governmental Authority" but some of his tough talk seemed to be getting dangerously close to language that could be construed as such, but all that would really do is extend the maturity on CDS contracts, it would not trigger payments which would still require a Failure to Pay.

Just to make it more interesting, the EFSF may be able to sell sovereign CDS.  More pain for shorts, and if you think they manipulated the situation enough when it wasn't their money, wait until you see what governments do, when it is their own money at stake if there is a Credit Event.

I don't believe that this "solution" has done that much and too many people are looking at sovereign CDS as a sign.  I think as the news is digested, real details come out, Sovereign CDS will continue to gap tighter, bonds of Germany and France will continue to be weak, Italian and Spanish bonds will give up some of their gains, and CDS in MAIN and XOVER and IG will drift wider in response to moves in bonds rather than moves in sovereign CDS.