Market Already Pricing In Greek 25% NPV 'Haircut'

As we just reported, Reuters has broken news that Greece is starting to grow a pair and negotiate directly with debtholders on a much larger haircut on its debt than Dallara's IIF is hoping for. This is significantly bad news in terms of both the powers-that-be losing control, banks capital raising and writedowns, CDS triggers, and EUR stress. Given that GGBs are generally trading at 25% of Par out past 1.5 years, the market had begun to discount this already but it is clear that the game of chicken just escalated and the fact that European financial credit closed only marginally off its lows while stocks soared into the green once again tells us where professionals are trading. US financials are losing gains now and ES is pulling back to VWAP as EUR sells off.

Peter Tchir, of TF Market Advisors, offers some more color on this next leg down in the SANFU that is Europe.

The good news is that the head of the IIF probably had his 15 minutes of fame and it can go back to being a cushy lobbying group rather than pretending it has real influence over the banks.

The bad news is generally bad though.  This goes back to being a very piecemeal and bank by bank, country by country situation.

With Greece being directly involved it increases the risk of a Repudiation/Moratorium Event for CDS.  That merely extends the maturity of existing CDS trades, but should scare the heck out of anyone who is long Greek risk to Dec. 20th.  The threat of not paying may be enough to trigger that.

While the IIF or EU was handling the negotiations, it was hard to trigger a repudiation/Moratorium Event.  As a short term CDS seller, I would be horrified by this development (though you should have expected it).  If they say anything that triggers, then CDS maturity is extended.  You would still need a Failure to Pay or some other Credit Event to trigger settlement.

The Failure to Pay Credit Event is also much higher.  This will be like herding cats.  Getting banks to agree to something "voluntary" was already hard, this will make it virtually impossible.  Greece will find that every bank tries to wiggle out of the risk.  That the ones with paper maturing in the near term will delay the most in hopes of getting paid out at par.  I think risk of a Credit Event has increased, and with Repudiation/Moratorium on the table, the cost of Dec. 2011 and March 2012 CDS should have increased a lot.

This is not good for bank share prices.  We saw have seen how bank liquidity has dried up even more after MF Global went under, and I have to admit I didn't think it would impact the market as much as it did.  I think fears of derivative losses cascading through the system are overblown, but I definitely have likely underestimated both the risk of that and the immediate hit to liquidity from those fears.  This is another clear risk-off change in European policies, and a complete embarrassment to Merkozy (though I could never understand why they felt the IIF could deliver).


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