Guest Post: Greek CDS Shennanigans

Tyler Durden's picture

Submitted by Finance Addict

Greek CDS Shennanigans

We now know that private holders of Greek bonds will be “invited” (seriously–this was the word used in the EU summit statement) to take a write-down of 50%–halving the face value of the estimated $224 billion in bonds that they hold. This will help bring the Greek debt-to-GDP ratio down from 186% in 2013 to 120% by 2020. The big question–apart from how many investors they will get to go along with this, given that they couldn’t reach their target of 90% investor participation when the write-down was only going to be 21%–is whether this will trigger a CDS pay-out.

That this is even up for discussion is mind-boggling. These credit default swaps are meant to be an insurance policy in case Greece doesn’t pay the agreed upon interest and return the full principal within the agreed timeframe. If they don’t pay out when bondholders are taking a 50% hit then what’s the point? I call shenanigans.

ISDA, the International Swaps and Derivatives Association that wrote the agreement governing most  derivatives trades, states clearly that a Credit Event would be triggered under the type of haircut proposed…but only if this haircut is forced on all bondholders. And here’s where it gets interesting.

There’s no doubt that this haircut is forced. Sure, sure, bondholders are only being “invited”. But listen to what Jean-Claude Juncker, Luxembourg prime minister and Euro Group president, had to say:

“It was the fiercely rendered wish by the people, Merkel, Sarkozy, Juncker, that if a voluntary agreement with the banks was not possible, we wouldn’t resist one second to move toward a scenario of total insolvency of Greece, which would have cost states a lot of money and which would have ruined the banks.”
-Source: Reuters

Sounds pretty coercive, no? Yet despite this it still looks like most Greek bondholders will be forced to pay for their own stupidity. ‘Cause as it turns out, over 90% of Greek debt is governed by the terms of Greek law. Which offers much less protection than the UK laws governing the remaining ~10%.

It may seem counterintuitive, but it would have been totally fine and standard practice to have more of this Greek debt covered by UK law. UK law governs a lot of financial contracts that otherwise have nothing to do with the UK because it’s simply seen as a good, solid upstanding legal framework.

Greek law, on the other hand….

What follows is a quick comparison, with thanks to Choi, Gulati and Posner of the Law School at the University of Chicago.

1. Negative pledge

  • English law-Greek bonds restrict Greece from giving more security to new borrowers without offering the same to earlier borrowers
  • Greek law-Greek bonds have no such clause

2. Pari passu

  • English law-Greek bonds say that all bondholders will be paid with equal priority in case of insolvency
  • Greek law-Greek bonds have no such clause

3. Collective Action Clause (CAC)

  • English law-Greek bonds can have changes imposed on all bondholders, if a majority agrees
  • Greek law-Greek bonds have no such clause

4. Cross-default 

  • English law-Greek bonds will have accelerated repayment if Greece defaults on any bond it has issued, whatsoever
  • Greek law-Greek bonds–well, you guessed it.

As you can see the English-law bonds give much more protection to bondholders than the Greek-law bonds. Not to mention the simple fact that Greek politicians can always change Greek law to get the outcome that they want. But it’s difference #3, Collective Action, that really explains why the Greek CDS will likely not be triggered. If Greek law-Greek bonds had a CAC and a majority of bondholders agreed to the 50% write-down then all bondholders would be forced to go along. That’s the type of legalistic coercion required to trigger the CDS; the threats from Merkozy & Co. don’t really count.

That’s not to say that this issue is closed. A decision to not pay the CDS out under these circumstances could do serious damage, anyway. The ISDA Determinations Committee will have the final word but will only weigh in if a market participant requests a ruling. And I do believe that somebody, somewhere is gonna request a ruling. The vote that wins an 80% majority of the Determinations Committee’s members will carry the day. So who’s on this mighty committee that has the power to affect the worth of hundreds of billions of dollars in investments, move global markets and make the leaders of 27 countries tremble like a dried leaf in a hurricane? From ISDA’s website:

You really could not make this stuff up. I’ll just leave you with these thoughts from a Reuters story earlier this year (emphasis mine):

Although there is no formal obligation, there are supposed to be Chinese Walls between the people sitting on the DC and traders that know the firm’s position on a given name. There still is, however, concern from some industry members that these Chinese Walls are not always respected in practice.

“Some people are certainly concerned they’re being manipulated by the dealers,” said one derivatives lawyer. “On technical points, the DC is fine. The problem is for larger decisions like Greece, where people are clearly going to vote their own self-interest. It’s not a perfect mechanism for big issues that affect a large amount of people to be decided by a small portion of the overall market.”

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PaperBear's picture

Shennanigans is the polite word for this.

falak pema's picture

btw : its spelt 'shenanigans' not shennanigans...and im not splitting shenanigans like hairs.


Is it likely that this coporate banking group having pledged their acceptance to Euro group as 'non coercitive' now pretend the contrary? Have you considered what THIS about turn does to their international credibility? as spokesmen of TBTF bankstas...

You don't walk away with impunity once you've said in writing 'there is voluntary agreement'...

ratso's picture

When is a CDS not a CDS, when it's for a Greek bond.  A new for of Liar's Bond Trading or how to live in an illusion and asking everyone else to join you.

narapoiddyslexia's picture

Is this what "bondage" means?

trav7777's picture

WTF difference does it make WHAT the haircut is?  Greece won't abide by any budget targets and will be back needing ANOTHER bailout in freakin 6 months.

Why should ANYONE take a writedown on Greece?  They should go take Greece as collateral.  I cannot believe that these idiots who thought up the EU would ever want a piss country like Greece in their

espirit's picture

Let's see if Greece's Pirahna Club robs the Widows and Orphans Fund first. 

That will be the prime indicator whether this is yet another rumor.

Oh regional Indian's picture

ratso, zatso.

But I think the masters swung the hammer to crack the illusion some time ago. It is on an unstoppable path now.

What we will see, starting next week, I imagine, is TPTB cannibalization. So many banks are shaky. Any one will tumble if their government support leg is kicked out from under them.

So, basically, I'm saying we will see politics Vs. corporations. Which is weird, because we know who pays who, right? All the world's a stage and all that sort of thing.

I hope this Sunday Passes calmly.


Nuclear Echoes

Added: Do any of the BRICS hold large tranches of greek debt? I keep thinking these guys will take to Asia again (contagion that is), like 1997. It'll be good for another 2-3 months of can-kick. That, or Brazil via Santander.

living on the edge's picture

This is almost as hilarious as Clinton saying "it depends on what the meaning of the word is is".


TheMerryPrankster's picture

Behind the wall, in the kitchen at shenanigans, the real discussion goes on:


GoinFawr's picture

@ Falak: At the risk of making Gold Leaf distinctions, what does a European wheat have to do with an old Californian word for skullduggery?

falak pema's picture

we say skull drudgery, but never mind, I'm a great fan of californian wine, surfing and silicon valley skull excellence...also european wheat is sweet and not GMO.

falak pema's picture

lots of lipstick today! Like in mad men!

disabledvet's picture

Boondoggle. Commence guffaw.

blueRidgeBoy's picture

I swear to God I'm going to pistol-whip the next person who says "shenanigans"

Uncle Sam's picture

And do you believe everything a lawyer from Chicago says?

Deadpool's picture

anyone stupid enough to hold Greek debt at this time deserves a 100% head-cut.

tarsubil's picture

Makes you wonder who is buying this shit. Perhaps it's Corzine clones destroying those not in favor anymore from the inside.

Deadpool's picture

the list is directly above....

tarsubil's picture

It appears I've gone crosseyed...

cossack55's picture

Just another reason to never (NEVER) buy any paper with counterparty risk (meaning ALL PAPER).  Toilet paper is good.

Central Wanker's picture

In case of toilet paper, it is OK to have shit as counterparty.

FeralSerf's picture

Not all toilet paper is good.  Have you tried the Soviet variety?

trav7777's picture

I think people bought Greek debt for the same reason they buy GSE's considered money good because the expectation is that there is a print operation behind it to prevent any default

jcaz's picture

LOL-  I'm thinking that no one spent much time around the holders before this fiasco...

If they're "asked", of course the holders will tell the EU to kiss their ass.

Everyone agrees on a solution- until it costs them actual MONEY.


Hippocratic Oaf's picture

I'm in the fixed income business. Doesn't matter if holders 'elect' to participate. Issuers do this all the time. Gives holders a sense of involvement. The deal will get done, at 50%. There are a few fortunate bastards that bought below 50.

Milton William Cooper's picture

Anyone looking for a gold ETF backed by T-bills?

jcaz's picture

.... And it's wrapped in magic pixie fairy dust, which enables it to pay an 8% dividend......

TheMerryPrankster's picture

and its tax free and you get a special tax credit just for reading the prospectus, let alone owning it.

peekcrackers's picture

You know whats in the purple kool aid .. drink at your own risk

TheMerryPrankster's picture

purple drank, apparently is a better investment.

HOUSTON — A 70-year-old Houston grandmother from the Phillipines has been charged with being the ring leader of a codeine distribution ring.

The woman, Lucita Uy, banked at least $10 million and used her own renegade pharmacies to purchase 97,000 pints of prescription-strength cough syrup and smuggle them from California to Houston to make a deadly potion wildly popular in the hip-hop world.

trav7777's picture

sizzurp is hardly deadly, but is very popular among a particular demographic.  But, surely poverty drove them to consume so much drugs; it couldn't be that consumption of tons of drugs leads to poverty.

French Frog's picture

Thank you ZH for being yet again such a wonderful source of news, explanations and above all ... education.

If I had more time on my hands, I would Thank You every day.

SheepDog-One's picture

Got to love these timeline adjustments...Wednesday it was do or die time, 2 days later after nothings been solved so theyll get back to looking at things, in around 20 years or so. WTF? Pretty good 20 year can punt, I dont think it will work so well though, by next week something else will blow up.

Amish Hacker's picture

I'd say by Monday. Everyone is going to have the weekend to think things over, then hands will slap foreheads in the long-delayed realization that the jig is up. When goalposts are moved so that defaults won't trigger default insurance, and markets are gamed to prevent price discovery, what's a poor boy to do?  

topcallingtroll's picture



jdelano's picture

ever heard of a bull/bear trap?  how about Goldman hawking CDO's to their own clients while secretly letting Paulson pick the worst of the bunch?  The big boys have one goal in life--to screw fools like you out of their daily bread.  

Capitalist10's picture

Hopefully a sizable minority of the bondholders will decline the "invitation".  Why not, if you have already paid for much of the CDS "insurance" up front?

Then the Greeks can either pay you your 150+% interest or they can default, triggering the CDS via a indisputable non-payment credit event.

slewie the pi-rat's picture

beware of greeks bearing bonds

Mercury's picture

Now I don't feel so crazy about asking pointed questions along these lines yesterday.

90% of Greek debt might be governed by Greek law but in terms of CDS being triggered or not - its what the fine print says in the CDS contracts themselves that really matters - no?

Is it generally the case that a default is only a default if the defaulting party (The Greek government) calls it a default?  Or is it the case that some very much not disinterested party/committee is tasked with giving the thumbs up/down on said trigger?

Either way I'm afraid to ask who would be dumb enough to enter into the long side of a contact with those kinds of terms...that would be like buying life insurance that only gets triggered when either the insured person admits he's dead or the insurer's family acknowledges that there has been a death. 

Actually, that would be more like buying American war insurance in 1946 that pays out if/when Congress declares war.    Ouch.

lolmao500's picture

That how you freaking protest. That's how you show who's a slave and who's not.

Veterans with AR15s protecting Occupy Phoenix

pragmatic hobo's picture

won't these greek bonds already tradeing at 70% discount prior to the agreement?

vegas's picture

We went over this yesterday. No credit default? This is bullshit. Governments and exchanges and other quasi-regulated groups like the NFA, SEC, FSA, and of course ISDA will make their own rules and then break them when the mood suits.

Look what Barry Soetero and his gang did to the Chrysler bondholders; fuck creditor rights, let's reward the unions.

ISDA are fucking pimps, just like the CME in Chicago. When members need help on short positions, no problem, just hike margin rates to squeeze out Johnny Retail who doesn't have the money in his account to hold the long position.

Oh, to many ISDA member banks on the sell side of the Greek CDS? No problem, it ain't a default. Keep the premium, and business as usual. Fuck you if you thought you were going to collect. Sue us.


cossack55's picture

Like what you said and how you said it.  You will never get elected.

jcaz's picture

Right on- no one will play in a game where the rules change every day.