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Reality Of EFSF Concentration And Contagion Risk Sets In
As the euphoria of a Bundestag vote begins to fade and the reality of the need to reduce Greek debt by more than 21% (or whatever the ridiculous number the entirely independent think-tank called the IIF is pushing now), we note that almost perfectly tick-for-tick the price of EFSF bonds today are inversely correlated with the EURUSD. It seems evident that our fears (oft discussed here) over the actual increased contagion and concentration risk that EFSF will withstand should it be more levered are clearly being gradually priced in - despite what every other correlation-driven momentum junkie asset class is saying. Perhaps buying EFSF protection (we are sure it will be quoted soon) is the new EUR hedge for all those stuck short?
Or is it more like buying EFSF bonds is a carry positive way to create a net EUR short?
UPDATE: EFSF bonds are tracking nicely higher as EUR breaks below 1.39.
Chart: Bloomberg
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I'm sinking! Buy the rumor. Sell the event!
Buy the bullshit, sell the joke.
'Perhaps buying EFSF protection (we are sure it will be quoted soon) is the new EUR hedge for all those stuck short?'
Affirmative.
CONtagion Risk????
CONtagion erupted 4 years ago. The global financial structure is and remains, on life support in the I.C.U. ward!
Contagion risk has been building for decades. It only came to light 4 years ago, and now TPTB are doing their best to deflect the light.
Serious question for someone who may actually know-
Can they actually do this massive greek haircut and NOT trigger CDS because they say it is not allowed to be a trigger event? Seriously, can they actually void written CDS contracts?
Good question. I don't know the answer, but it would seem that the market will determine the outcome, regardless of what TPTB try to do.
CDS are not uniform. It depends on what is written in the contract. For a lot of CDS, ISDA (isda.org) has the power of determining if an event is a credit event, and ISDA is run by the banks.
It would be nice if Tyler could do a piece on this, or a contributor that knows; a merit worthy topic for sure in this environment.
Are you reading Tyler?
Good question PR... I would love to know the answer.... CDS market is becoming a joke. FT had an article about it. If CDS is not triggered, you will see massive shorting of PIGS bonds, driving up yields... not good... Pick your poision..
With so many rules being bent, I think CDS will not get triggered as that would consititute pain now.. and who cares about pain later?
I believe if the creditors voluntarily take a haircut, it does not trigger an event. That would still cause other consequences I'm sure, like downgrades?
EU talks deadlocked on demands for "voluntary" 100% haircut on Greek bonds.
When the summit ends and a statement with some promises comes out, EUR and stock markets will soar again.
Buy the rumor........sell the news. Don't you think this big short covering rally in the euro and equities was pricing in perfection already? I do. Unless they come out with a truly shock-and-awe statement, this is already fully priced in.
The Bundestag vote was said to be priced in too.
The global finacial system is on life support, the sooner euthanasia is legalised the better for all concerned ... meanwhile the Doctors will just keep the patient going ... running up a huge and unessessary medical bill for the family depriving them of their inheritance.
pull the plug
They can't pull the plug untiil all brain-wave activity ceases. Oh wait disregard that, you're talking about the global financial system and not politicians.