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Greek CDS Trigger Priced In

Tyler Durden's picture


As the Greek parliament supposedly votes on the introduction of CACs into the outstanding Greek government bonds (governed under Greek law), the Greek bond and credit derivative market has reacted strongly. The price for the basis package (buying the Greek bond and simultaneously buying credit protection on that bond) has jumped to six-month highs and Greek CDS has broken to 73% upfront (record highs). Prices of some GGBs are up today - driven by technical demand for bond-CDS basis traders and also demand for some of the more liquid UK-law bonds - but most are down with the short-end suffering the greatest losses. The bottom line is this shift in the CDS and bond market for Greece suggests a very high likelihood of a credit event 'trigger' in the not-too-distant future and while net notionals are manageable and collateralized, there is always gap days (like today) which mean big cash needs for collateral managers and the unknowable impact of the daisy-chain of gross notionals to worry about.

The jump in the price for the basis package - which moves to 100 in the event of a trigger event theoretically, implies a very high probability of a trigger event occurring in the very short-term.

Most GGBs are lower in price with the hope-full short-end holder suffering the most. The green oval shows some outperformers (beware the thinness of markets) which represent both technical demand from Bond-CDS basis buyers as well as demand from traders looking for UK-law bonds.

Charts: Bloomberg


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Tue, 02/21/2012 - 10:38 | Link to Comment Thomas
Thomas's picture

Why would you buy CDS on Greek bonds? Counterparty risk has gone to infinity. Nobody intends to declare a default. It's like the damned Black Knight in Monty Python with his limbs lopped off declaring all is well. I think the CDS market is heading straight for the fan.

Tue, 02/21/2012 - 10:39 | Link to Comment maxmad
maxmad's picture

True dat!  I dont even like Greek music!  Why would I want one of their Cds?

Wed, 02/22/2012 - 03:35 | Link to Comment Sudden Debt
Sudden Debt's picture

I haven't heard Greek music before but since they say "PARTY IN ATHENS LIKE IT'S 2012!" there must be something good in it no?

Tue, 02/21/2012 - 10:47 | Link to Comment GeneMarchbanks
GeneMarchbanks's picture

'Nobody intends to declare a default.'

The fact that default needs to be 'declared' says everything about 'markets'.

Tue, 02/21/2012 - 10:50 | Link to Comment WonderDawg
WonderDawg's picture

There it is, right there. Good point, Gene.

Tue, 02/21/2012 - 10:53 | Link to Comment bdc63
bdc63's picture

default is like pornography -- I know it when I see it.

Tue, 02/21/2012 - 11:03 | Link to Comment giovanni_f
giovanni_f's picture


Tue, 02/21/2012 - 11:04 | Link to Comment Thamesford
Thamesford's picture

I think you're getting your naked options confused with your worthless tranches.

Tue, 02/21/2012 - 10:54 | Link to Comment Everybodys All ...
Everybodys All American's picture

It's either the CDS or the bond market. Both can't go in the same direction. If the CDS is declared by the ECB as worthless there will be massive selling of bonds all over the EU. If you are not hedged any longer why would you take that much risk? If the CDS pays as it is intended then the bonds of Greece will fall but the systemic risk of the entire EU bond market is at least not at risk.

Tue, 02/21/2012 - 10:37 | Link to Comment maxmad
maxmad's picture

Itchy Trigger Finger, bitchez!

Tue, 02/21/2012 - 10:44 | Link to Comment tradewithdave
tradewithdave's picture

Price of selective access to naked shorting by hedge funds priced in selectively.

Tue, 02/21/2012 - 10:46 | Link to Comment scatterbrains
scatterbrains's picture

kinda looks like the market is beginning to realize the only thing real and tangible is commodities.. out of paper products such as currencies, stocks, bonds etc. into real hard assets of all stripes.  I think I hear the rumblings of a stampede off over the horizon.

Tue, 02/21/2012 - 10:52 | Link to Comment SheepDog-One
SheepDog-One's picture

Right, so then 'all is well far as the eye can see'...which probably means a couple hours at most.

Tue, 02/21/2012 - 10:53 | Link to Comment giovanni_f
giovanni_f's picture

Could we please change the can-down-the-road subject? My proposals: Illinois, California, UK.

Tue, 02/21/2012 - 11:00 | Link to Comment Thamesford
Thamesford's picture

They may have to invent the "Kebab" clause in the new agreements, whereby, there is no default if the reconstituted meat of the deal is hung up on a stick, cut into thin slices, to be shared out,  dressed up with a constraining austere salad and problematic, leaky yoghurt sauce, with a smidge of spicy sauce to add some zing and finally wrapped in an apparently sturdy, but ultimately pita-ful and collapsing short term wrapper.

Tue, 02/21/2012 - 12:36 | Link to Comment Ned Zeppelin
Ned Zeppelin's picture

Now that's funny.

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