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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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Fri, 10/28/2011 - 12:00 | 1821108 PaperBear
PaperBear's picture

Shennanigans is the polite word for this.

Fri, 10/28/2011 - 12:11 | 1821127 falak pema
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'...

Fri, 10/28/2011 - 12:13 | 1821185 ratso
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.

Fri, 10/28/2011 - 12:19 | 1821207 narapoiddyslexia
narapoiddyslexia's picture

Is this what "bondage" means?

Fri, 10/28/2011 - 12:54 | 1821340 trav7777
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

Fri, 10/28/2011 - 13:00 | 1821375 espirit
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.

Fri, 10/28/2011 - 12:21 | 1821209 Oh regional Indian
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.

Fri, 10/28/2011 - 13:09 | 1821417 trav7777
trav7777's picture

more dire predictions?

Fri, 10/28/2011 - 12:31 | 1821246 living on the edge
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".


Fri, 10/28/2011 - 12:28 | 1821241 TheMerryPrankster
TheMerryPrankster's picture

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


Fri, 10/28/2011 - 14:23 | 1821822 GoinFawr
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?

Fri, 10/28/2011 - 15:21 | 1822174 falak pema
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.

Sun, 10/30/2011 - 00:26 | 1825698 GoinFawr
GoinFawr's picture

I hear that

Fri, 10/28/2011 - 15:22 | 1822187 falak pema
falak pema's picture

lots of lipstick today! Like in mad men!

Fri, 10/28/2011 - 12:12 | 1821177 disabledvet
disabledvet's picture

Boondoggle. Commence guffaw.

Fri, 10/28/2011 - 13:44 | 1821446 blueRidgeBoy
blueRidgeBoy's picture

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

Fri, 10/28/2011 - 14:24 | 1821837 GoinFawr
GoinFawr's picture


Fri, 10/28/2011 - 13:41 | 1821575 TheFourthStooge-ing
Fri, 10/28/2011 - 16:33 | 1822498 Uncle Sam
Uncle Sam's picture

And do you believe everything a lawyer from Chicago says?

Fri, 10/28/2011 - 12:00 | 1821110 Deadpool
Deadpool's picture

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

Fri, 10/28/2011 - 12:09 | 1821166 tarsubil
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.

Fri, 10/28/2011 - 12:10 | 1821175 Deadpool
Deadpool's picture

the list is directly above....

Fri, 10/28/2011 - 12:20 | 1821212 tarsubil
tarsubil's picture

It appears I've gone crosseyed...

Fri, 10/28/2011 - 12:13 | 1821182 cossack55
cossack55's picture

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

Fri, 10/28/2011 - 12:56 | 1821347 Central Wanker
Central Wanker's picture

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

Fri, 10/28/2011 - 18:32 | 1822973 FeralSerf
FeralSerf's picture

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

Fri, 10/28/2011 - 12:15 | 1821193 fuu
fuu's picture


Fri, 10/28/2011 - 13:10 | 1821422 trav7777
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

Fri, 10/28/2011 - 12:02 | 1821114 jcaz
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.


Fri, 10/28/2011 - 12:23 | 1821230 Hippocratic Oaf
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.

Fri, 10/28/2011 - 12:01 | 1821116 Milton William ...
Milton William Cooper's picture

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

Fri, 10/28/2011 - 12:03 | 1821132 jcaz
jcaz's picture

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

Fri, 10/28/2011 - 12:30 | 1821252 TheMerryPrankster
TheMerryPrankster's picture

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

Fri, 10/28/2011 - 12:02 | 1821122 peekcrackers
peekcrackers's picture

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

Fri, 10/28/2011 - 12:32 | 1821259 TheMerryPrankster
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.

Fri, 10/28/2011 - 13:12 | 1821429 trav7777
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.

Fri, 10/28/2011 - 12:03 | 1821124 French Frog
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.

Fri, 10/28/2011 - 12:06 | 1821129 SheepDog-One
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.

Fri, 10/28/2011 - 12:26 | 1821239 Amish Hacker
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?  

Fri, 10/28/2011 - 12:58 | 1821364 topcallingtroll
topcallingtroll's picture



Fri, 10/28/2011 - 13:40 | 1821564 jdelano
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.  

Fri, 10/28/2011 - 12:05 | 1821142 Capitalist10
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.

Fri, 10/28/2011 - 12:06 | 1821143 slewie the pi-rat
slewie the pi-rat's picture

beware of greeks bearing bonds

Fri, 10/28/2011 - 13:04 | 1821144 Mercury
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.

Fri, 10/28/2011 - 12:12 | 1821145 lolmao500
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

Fri, 10/28/2011 - 12:07 | 1821154 pragmatic hobo
pragmatic hobo's picture

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

Fri, 10/28/2011 - 12:09 | 1821156 vegas
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.


Fri, 10/28/2011 - 12:15 | 1821191 cossack55
cossack55's picture

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

Fri, 10/28/2011 - 12:16 | 1821199 jcaz
jcaz's picture

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

Fri, 10/28/2011 - 13:48 | 1821610 Honey Badger
Honey Badger's picture

You mean the sellers of CDSs also vote on whether or not to pay them off?  You're shitting me!  I'm shocked!

Fri, 10/28/2011 - 12:31 | 1821190 Quinvarius
Quinvarius's picture

Gold is your only insurance.  They are changing the rules as fast as they are printing the money.  We are firmly out of the gray area here.  There is no more doubt.  The entire system is failing to the point where nothing is predictable.  You lose even when you are right.  You should not be in the now.  This isn't a look forward anymore.

Fri, 10/28/2011 - 12:15 | 1821194 FunkyMonkeyBoy
FunkyMonkeyBoy's picture

This is how the end game plays out, didn't you know? What? You thought it would all be nice, polite and gentleman-like? No, we are dealing with the scum filth of the earth and they will make sure everyone is raped to the point of death before letting the system fall...

... that was the design of the system all along.

Fri, 10/28/2011 - 12:15 | 1821195 LawsofPhysics
LawsofPhysics's picture

Heard an U.K. hedge fund guy on NPR say that a greek default was "no big deal" as far as contagion risk via CDS.

All I could think was, well damn, why didn't they already default then.

When the propaganda starts getting this deep, well, I can not help but wonder what wicked plan is brewing beneath the surface in parlamentary back rooms around the world.  I think they are on to Barry.  Basically a big FU to all the european suckers who fell for the CDS.  Not good.

Fri, 10/28/2011 - 12:31 | 1821253 long_and_short
long_and_short's picture

not a CDS expert by nay means, but if they are toast, then wouldnt VAR now increase exponentially at the firms hoding sov debt?

would really like to know if CDS is used to offset the debt holdings when looking at VAR

Fri, 10/28/2011 - 12:51 | 1821320 reload
reload's picture

I think you are right - CDS will be in the VAR calculation. As it turns out CDS may not be much of a hedge - will CDS be removed from VAR calculations? hmmm probably not - would expose too much risk on already shitty ballance sheets. Ponzi on.

Fri, 10/28/2011 - 12:34 | 1821262 Steroid
Steroid's picture

Greek bondholders just got GM-ed.

Professor Obama taught the Eu crooks well.


Fri, 10/28/2011 - 12:37 | 1821275 gwar5
gwar5's picture

Anagram: Greek write down = Networked we rig


Fri, 10/28/2011 - 12:38 | 1821277 Quinvarius
Quinvarius's picture

The way they are changing rules and making stuff up now reminds me of a book series I read called "Heros in Hell".  One of the things I remember about the book was that no matter what you did in Hell, it didn't work.  Picasso was there painting.  Every time he pained a picture it changed into a smear.  That is just like this shit system we are watching die.  You'd best evacuate while you can.  There is no longer any attention being paid to contracts or promises.  No matter how you try to protect yourself in the system, they are going screw you.  They are doing things that should not even be up for debate.  And that is far worse than any default.

Fri, 10/28/2011 - 13:12 | 1821385 OneEyedJack
OneEyedJack's picture

"The way they are changing rules and making stuff up"


Edited for content

Look I'm over 50 and a late comer to the market. It took a long, long time to even understand the rules of the market


Now, the rules don't matter any more. I can't fathom how they can do this without consequence. Like a life insurance policy where the insured dies and the insurance rep says,

" that's no reason for a claim"

I mean damn


Fri, 10/28/2011 - 13:21 | 1821469 Quinvarius
Quinvarius's picture

I know where you are coming from.  If they don't pay out on this insurance, what other insurance am I paying for that won't get paid out on?  It taints the entire system both on and off wall street.  It goes down to the granular level of:  What happens when I buy a stock and it goes up the next day?  Do they just cancel my buy?

Fri, 10/28/2011 - 12:41 | 1821279 gwar5
gwar5's picture

Anagram: Greek write down = Networked we rig

Telegram: you lose!


Fri, 10/28/2011 - 15:01 | 1822071 GoinFawr
GoinFawr's picture


Fri, 10/28/2011 - 12:39 | 1821284 machineh
machineh's picture

All the chickens in the henhouse are shocked ... SHOCKED ... that the foxes are no longer honoring their promise to protect them from being eaten alive.

FOXES (read: bankstas) HAVE TO EAT TOO, YOU KNOW!!

Fair or 'fowl' -- tastes like chicken! All your CDS premium are belong to us!!

Fri, 10/28/2011 - 12:40 | 1821285 nonclaim
nonclaim's picture

So the CDS does not pay if your losses are only up to 50% ... fine, ok. But what if the losses are now 51%? The CDS is good for the whole? Or because you agreed to take half off it pays only the rest?

At this point I believe Zeno's dichotomy paradox will be invoked to prevent any payment...


Fri, 10/28/2011 - 12:46 | 1821304 Chicken_Little
Chicken_Little's picture


I'm totally bumfuzzled by all of this. Back in the olden days, Joe Kennedy was tasked by the US government to go in there and clean it up. He even admitted that it was corrupt and he knew how to clean it up. I'm convinced that power is the the most addidive drug for humans.

Fri, 10/28/2011 - 12:49 | 1821313 unionbroker
unionbroker's picture

it is their game we are only playing it

Fri, 10/28/2011 - 12:51 | 1821324 topcallingtroll
topcallingtroll's picture

This is what i said yesterday. The greeks can keep paying on bonds held by their pension funds and screw everyone else.

About half the remaining bonds will be tendered. Arbitragers own that much.

The rest? Greece simply defaults. Everyone is tied up in court for years. AND THE HUGE CDO BOMB IS AT MOST 1/4TH THE EXPLOSIVE POWER IT USED TO BE.

Fri, 10/28/2011 - 12:53 | 1821338 MS7
MS7's picture

"'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%."

Protection for whom? The creditors? The Greek government would prove once again how it is serving foreign interests if it agreed to change to UK law.

Fri, 10/28/2011 - 12:56 | 1821352 imapedestrian
imapedestrian's picture

This is great news... I am happy, so very happy that not one of those piece of shit CDS will payout.  What a terrible innovation they were.

CDS longs, hope you like that feeling of getting a big kick in the nuts... enjoy!

Fri, 10/28/2011 - 12:59 | 1821367 imapedestrian
imapedestrian's picture

The author should have just not wated his time with all writing and just posted...but, but, but I was going to get rich from Greek CDS... how can they do that to me?  It's not fair... I already bought a new Mercedes for my wife... what am I going to do?

Fri, 10/28/2011 - 13:00 | 1821371 Marge N. Callz
Marge N. Callz's picture

Just keep saying "It's not a credit event...It's not a credit event...It's not a credit event..."

To quote George Costanza, "It's not a lie, if you believe it."

Fri, 10/28/2011 - 13:00 | 1821374 paul20854
paul20854's picture

In their swap agreement with the European Central Bank, the ECB notes this:

"The Governing Council of the ECB decided to reactivate, in coordination with other central banks, the temporary liquidity swap lines with the Federal Reserve, and resume US dollar liquidity-providing operations at terms of 7 and 84 days. These operations will take the form of repurchase operations against ECB-eligible collateral and will be carried out as fixed rate tenders with full allotment. The first operation will be carried out on 11 May 2010."

On May 3rd, 2010, the ECB decided that Greek Bonds, despite their ratings downgrades, are acceptable collateral. This means that the ECB will be entering into repurchase agreements with holders of Greek Debt in exchange for US Dollars that were printed by the US Federal Reserve.



This may sound incredible, but the US taxpayer may be on the hook for 50% of the losses on these Greek CDS abominations. No wonder the EU leaders are smiling like Cheshire cats!

Fri, 10/28/2011 - 13:03 | 1821388 Bansters-in-my-...
Bansters-in-my- feces's picture

If the bndholders don't revolt,they get what they deserve.

How many times can you let the school yard bully push you around before you kick him in the nuts ?

Fucking ISDA....









Fri, 10/28/2011 - 13:08 | 1821411 silvershadow
silvershadow's picture

Let's say I own greek debt and have hedged it with a CDS. My bonds and CDS are marked to market.  Now I'm being offered 50 cents on the dollar for a voluntary exchange for my greek bonds, with no assurance that the CDS will pay out as the ISDA may not rule that the voluntary exchange is a "Credit Event"?  What do I do?  I ignore the request for a voluntary exchange and instead wait for the Credit Event, where I am assured that I will be paid out on my CDS.  Its a simple as that. 

Fri, 10/28/2011 - 14:30 | 1821872 Breaker
Breaker's picture

Actually, I think you can exchange the bond and still keep your CDS. So you get a better quality bond (at 50% albeit) and your CDS will likely be triggered a some point in the future when Greece cannot pay on the reduced debt to someone else.

OTOH, keeping the bond means you get 100% as long a thing don't fall completely apart. The EU will make sure that no "involuntary" event of defaut occurs. Of couse, if things fall completely apart, you won't be seeing any return on the 50% bond either.

Fri, 10/28/2011 - 13:12 | 1821428 gatorengineer
gatorengineer's picture

ISDA said its not a credit event as long as its volunary....  Couldnt agree more....  They will get 20-30% VOLUNATARY participation at the 50% rate, and then the can of worms will be back to wide open......  Europe will delay this into the spring of 2012 which by when the Eurozone will have long sinced died from other wounds (namely Italy Ireland and Portugal)......


 Only Ben and the magic press can save them now.....

Fri, 10/28/2011 - 13:23 | 1821438 Shylockracy
Shylockracy's picture

Another shenanigan you often hear, is that Germany has "stolen Greece's gold" during WWII. Why the opposite seems to be the truth. Just to give some historical perspective, this excerpt is an uncontested testimony during the Nuremberg trials:


DR. HORN: Now, another matter. Is it correct that Herr Von Ribbentrop gave orders that under all circumstances the French franc should be sustained against inflation?

VON STEENGRACHT: Such measures can apply only to a time when I was not yet State Secretary. But I know that the basic attitude towards France and all occupied territories was that under all circumstances their currency was to be preserved as far as possible, or rather should be preserved by all means. That is why we often sent gold to Greece in order to attempt to maintain the value of the currency there to some extent.

DR. HORN: What was accomplished in Greece by sending this gold there?

VON STEENGRACHT: By sending gold to Greece we lowered the rate of exchange of foreign currencies. Thus the Greek merchants who had hoarded food to a large extent, became frightened and threw the food on the market, and in this way it was made available to the Greek population again.



Now, then, Witness, are you acquainted with the viewpoint of the German economic authorities, and particularly of the Defendant Funk, in regard to the question of the clearing of debts incurred by Greece and the question of how Greece was to be treated with regard to this clearing system?

NEUBACHER: Concerning the mutual financial charges and obligations, I spoke at one time to the Reich finance Minister, Schwerin Von Krosigk, and it was proposed that at some later date after the war the claims and counterclaims were to be settled on the basis of a common denominator.

DR. SAUTER: And at that time, during the war, how was the question of this clearing dealt with?

NEUBACHER: Regarding the economic events in Greece, I can give you information based on my own observations only, starting with October 1942. At that time, when I first came to Athens, the Greek currency had already been considerably devaluated, and the circulation of banknotes had increased by something like 3,000 percent.

Greece also suffered an economic setback due to the fact that, in addition to a progressing inflation, an attempt had been made to introduce in Greece a planned economy with ceiling prices along German lines. The result was, of course, that the merchants selling Greek goods suffered losses when they were paid later. On the Other hand, when I arrived there the importers of German goods made tremendous profits, because they paid Reichsmark at the rate of 60 on the clearing and resold the goods at a rate of about 30,000. This chaos, due to the inflation in connection with the attempt of introducing a planned economy on the German pattern, could be remedied only by transforming the black market in Greece into a completely free market. The two experts of the Axis Powers introduced this measure with considerable success at the end of October 1942. Within a few weeks all shops and markets were full of goods and foodstuffs; the prices of food dropped to one-fifth and prices of manufactured products to one-tenth. This success could be maintained for 4 months in spite of increasing inflation.

DR. SAUTER: Dr. Neubacher, is it true that the Defendant Funk, who was Reich Minister of Economy at that time, proposed during a conversation or in correspondence he had had with you that, in spite of the shortage of goods prevailing in Germany, a considerable amount of goods should be sent from Germany and other European countries, particularly to Greece?


15 April 46

NEUBACHER: Reich Minister Funk, with whom I discussed the difficulties of my task, and I both fully agreed that a maximum of goods should be transported to Greece, and certainly not only food. I secured not only 60,000 tons of food at that time but also German export goods, since it was hopeless to try to stop an inflation or the effects of an inflation on the prices, if there were no supplies. Reich Minister Funk supported exports to Greece with the view to a restoration of normal market conditions with every means at his disposal.

DR. SAUTER: You know, Witness, that since transport from Germany to Greece had become impossible, the Defendant Funk made every effort to have goods transported on neutral ships, furnished with British navicerts, from Germany to Greece in order to combat as far as possible the already impending famine.

NEUBACHER: I think that was between 1941 and 1942 when l had not yet arrived in Greece. In 1943, when shipping in Greek waters had completely stopped for us, because all ships had been torpedoed and the railroads had become the object of incessant acts of sabotage and dynamiting, I, with the help of the Swedish Minister, Alar, who directed the International Relief for Greece, applied for British navicerts for food transports to Greece. The British granted this application, and when our own means of transport had ceased to exist, the Swedish boat Halaren went from Trieste or Venice to the Piraeus once a month, loaded with German food supplies for Greece.

DR. SAUTER: And Funk, the Reich Minister of Economy at that time, played an important part in these actions, did he not?

NEUBACHER: Reich Minister of Economy Funk took a very positive interest in the Greek question, a question which is unique in the history of economy, and he supported me in my efforts with every means at his disposal.



It looks like this is not the first time the Germans bail out the Greeks, only this time the Germans will get in return another Holocausttm franchise.


Fri, 10/28/2011 - 13:22 | 1821472 s2man
s2man's picture

Screw this, I say.

But it will turn out, Screw me.

Fri, 10/28/2011 - 13:35 | 1821535 Yen Cross
Yen Cross's picture

 I read the article. A( Nice read by the way), which takes me to my next comment. I have to give that little { Mighty Mite} , Simon Hobbs a   Golf Clap.  He has gone " Vampire Squid" , on the worthless tentacles of the European Union! I'm impressed Simon.

  Keep up the good work, and stay away from Merve the Swerve.

A brief outlook for next week, before the Great Retrace Tuesday.

Fri, 10/28/2011 - 13:47 | 1821604 Darth Sidious
Darth Sidious's picture

i don't really understand what you are saying. 

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.

wouldn't a CAC mean that a collective "volunteer" haircut would allow for no "event of default".  Without the CAC, any particular bondholder can hold out and if paid only 50% would have been defaulted on under definition one might come up with. 


what am i missing?

Fri, 10/28/2011 - 14:12 | 1821751 AbuSous
AbuSous's picture

In my opinion, if a default event is not called for a 50% hair-cut that shall be a VERY VERY dangerous for CDS market since it will destroy the trust in the CDS market.So it is plain and simple: Market manipulation and they shall be flooded with law suites.


Fri, 10/28/2011 - 14:18 | 1821795 Ellesmere
Ellesmere's picture

Great article!!

This stuff is opaque for he non-initiated.

Fri, 10/28/2011 - 14:23 | 1821827 Watson
Watson's picture

There is less here than meets the eye. If you own Greek bonds hedged with CDS: 1. Refuse all offers to convert the bonds; 2. Carefully watch your custody account; 3a. You get back, on time and in full, all the contractual coupon and principal; 3b You don't, so you cut and paste the relevant parts of the custody statement to ISDA, asking for an Event of Default to be declared, copying the email to the world's financial press. I think this works. Further, if Merkel still in power, situation will not get past 3a above, as whatever Greece does/doesn't do, Germany will make your bond receipts whole. Watson

Fri, 10/28/2011 - 14:33 | 1821895 ddtuttle
ddtuttle's picture

If you read Janet Tavakoli's article, its clear that dumb money CDS's are the only ones controlled by the ISDA, by virtue of the contract being ISDA boilerplate.

However, smart money (everybody on the list up there), would write contracts that were much more solid.  These are private contracts, and can have anything in them still hold, regradless of what the Eurocrats would like.

So we need to expect a rather large number of CDS to have NOTHING to do with the ISDA, which is for suckers.

Fri, 10/28/2011 - 14:43 | 1821963 Yen Cross
Yen Cross's picture

Anyone! I reiterate! Anyone that invests in the EFSF is doing it for politcal reasons. Ex; BRICS...  Italy has over (2) Trillion in debt obligations ALONE! This is nothing more than another can being kicked into the great " Dumpster", of so called " Wealth".

  For the earlier poster. The default obligations are not triggered, as they are " voluntary"... HYPOTHETICALLY of course.

Fri, 10/28/2011 - 23:59 | 1823674 Fox Moulder
Fox Moulder's picture

So the choice was:


1. Take a 50% haircut and get 50%;

2. Take a 100% cut and get paid in full by the CDS seller?

Sat, 10/29/2011 - 09:59 | 1824095 Mike2756
Mike2756's picture

They say it's no big deal.

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