Greek CDS Trigger Priced In

As the Greek parliament supposedly votes on the introduction of CACs into the outstanding Greek government bonds (governed under Greek law), the Greek bond and credit derivative market has reacted strongly. The price for the basis package (buying the Greek bond and simultaneously buying credit protection on that bond) has jumped to six-month highs and Greek CDS has broken to 73% upfront (record highs). Prices of some GGBs are up today - driven by technical demand for bond-CDS basis traders and also demand for some of the more liquid UK-law bonds - but most are down with the short-end suffering the greatest losses. The bottom line is this shift in the CDS and bond market for Greece suggests a very high likelihood of a credit event 'trigger' in the not-too-distant future and while net notionals are manageable and collateralized, there is always gap days (like today) which mean big cash needs for collateral managers and the unknowable impact of the daisy-chain of gross notionals to worry about.

The jump in the price for the basis package - which moves to 100 in the event of a trigger event theoretically, implies a very high probability of a trigger event occurring in the very short-term.

Most GGBs are lower in price with the hope-full short-end holder suffering the most. The green oval shows some outperformers (beware the thinness of markets) which represent both technical demand from Bond-CDS basis buyers as well as demand from traders looking for UK-law bonds.

Charts: Bloomberg