As First Greek CDS "Anstalt" Appears, A Question Emerges: Did Banks Not Square Off Margins?

The irony is not lost on us that Bloomberg is reporting that KA Finanz, an Austrian bad-bank supported by the Austrian government, faces as much as a €1 billion need for funding to cover its exposures to Greek CDS (coughcreditanstaltcough). In a statement this morning, which we noted in a tweet, the bank noted "activation of the CDS with an assumed loss ratio of about 80% would mean an additional provisioning charge of EUR 423.6 million". KA Finanz's total amount of Greek CDS exposure is around EUR1bn. What is shocking and should be of great concern is that we have been led to believe that very little net cash will change hands on the basis of the $3.2bn net aggregate market exposure. This was based on the now false premise that variation margin was maintained and transferred throughout the process (as we note below from recent IMF filings). What appears to have happened is that dealer to dealer variation margin has been, let's say, less rigorous as perhaps all collateral was netted up across all exposures (or simply ignored on the basis of government backstops). The far bigger question then is: are banks simply marking ALL sovereign CDS at par, and not paying off cash to other dealers? Remember it only takes one counterparty in the chain to turn net into gross and quality collateral seems tied up a little right now at the ECB (or with margin calls).

And then this from KA Finanz' 2011 Interim Statement:

Supplementary to the measures already taken by the European Union and the IMF (International Monetary Fund), the measures now initiated are expected to permit a sustainable stabilisation of the Greek budgetary situation. Moreover, statements made by the International Swaps and Derivatives Association (ISDA) suggest that the measures described above will not trigger a credit event of credit default swap (CDS) portfolios. In view of these circumstances and given the measures already taken and now extended by the European Union, KF does not expect – from today’s point of view – a default of loans and advances to the Republic of Greece.


KF’s total direct exposure to the Greek state amounts to EUR 818.6 million; moreover, the bank holds government-guaranteed bonds of EUR 164.6 million and government bonds of EUR 636.2 million. The issue of programme participation only arises for securities maturing by 2020. As of 30 June 2011, this portfolio represents a book value of EUR 311.5 million, of which EUR 303.1 million is, however, locked in until maturity in repo-type TRS (total return swap) funding positions. Under civil law, these positions have been sold to third parties against inflow of liquidity; the underlying risk remains with KF through a CDS structure.

So it does. And surprise, Surprise: so until the bank assumed there would be no CDS, it decided not to daily variation margin its exposure. And only now it has to? But, but, ISDA said "what was decided today was anticipated and had been decided for quite a while." Did KA not get the memo to pay its counteparties when it had to at the end of trading every single day?

Surely KA is all alone in flagrantly circumventing the primary requirement in posting cash shortfall margin.


Oh, and congratulations Austrian taxpayers, you are the latest ones on the hook to pay US hedge funds and banks for the privilege of Greece defaulting.