Greek Default Assured

Crossposted from The Stars Hollow Gazette

Not that I personally think their analysis is all that sound, but the second of the big three rating agencies has announced their intention to declare a CDS triggering event regardless of how the negotiations continue.

As we are constantly reminded by the Banksters, the intent of a Credit Default Swap is as insurance against a default in payments.  In fact they are used to make side bets on outcomes and their notional value almost always exceeds the actual underlying asset by orders of magnitude.

So the question is- will they pay off?

In the 2008 financial collapse the chief issuer of these instruments, American International Group, went bankrupt and only massive intervention by the U.S. Treasury Department and Federal Reserve Bank allowed them to make good their obligations at face value.

This was Insurance Fraud on a historic scale.  The rules require you to cover your policies.

Because we don’t know the actual amount of CDSes it is difficult to predict whether they will be honored or not but that’s only the first wave of the problem.  Spain, Portugal, and Italy also face default because of the usurious interest rates currently being demanded and a Greek default is only likely to increase their vulnerability.

European policy makers have shown no indication that they actually understand the magnitude of the difficulty and every response so far has been wrong headed austerity.  The fundamental reality is that their economies can no longer support the inflated, leveraged, fictional values the holders of these worthless scraps of paper demand and the reckoning is going to come from their pockets simply because they’re the ones holding the hot potato.

It’s coming.  It’s coming soon.  A lot of people and institutions that considered themselves quite well off are going to find their estimations substantially reduced.

Greek Debt Talks Still Without Resolution; Bondholders Make Final Offer

By: David Dayen, Firedog Lake

Monday January 23, 2012 6:20 am

The debt talks between Greece and their bondholders, thought to be a done deal late Friday, spilled into the weekend and still found no resolution as of today. The short version is that the creditors want a higher coupon, or interest rate on the new bonds they’ll accept in exchange for taking at huge hit on the bonds they currently hold.

At a low interest rate, the creditors would then call the deal involuntary, a credit default swaps would trigger. However, according to the Fitch rating agency, there is no such thing as a voluntary debt restructuring, and they would read any deal as a default event. This is why Noriel Roubini says we will see “a credit event” in Greece either way.

The bondholders presented what they called their "maximum" offer over the weekend. Charles Dallara, the managing director of the Institute for International Finance, who has been negotiating on behalf of the creditors, said that both sides were at a “crossroads” and the “limits of a voluntary deal.” Interestingly, the biggest holdout could be the European Central Bank, which holds 55 billion euros of Greek debt and doesn’t want to take any losses on it. The EFSF, the European bailout fund, may have to buy the debt off the ECB at par to get a deal structured.

Greece has already said they would change the terms of the bonds by law, if need be, but then some creditors would hold out and there would be litigation and CDS triggering.

Anything controversial or unmanageable out of Greece would risk contagion elsewhere in Europe, especially in Portugal, probably the next most-threatened country on the periphery. The dangers in Europe are very much apparent here.

S&P: Greek Debt Restructuring Would Be a Default

By: David Dayen, Firedog Lake

Tuesday January 24, 2012 8:55 am

Standard and Poor’s has become the second rating agency to say that, regardless of the conclusion of the Greek debt restructuring, they would judge the country as in "selective default". With two rating agencies – Fitch is the other – now on the record about default, it’s almost certain that the announcement of the deal, if we ever get one, will trigger credit default swaps.

So I see no point in having the negotiations continue. They were predicated on getting bond holders to accept a voluntary haircut, to avoid the triggering of CDS. That will now be impossible. And the Greek government has the ability to change the law and mandate the new payments on debt. So they might as well just do that, at this point. In truth, there never was a voluntary haircut, anyway. So everyone might as well tell the truth.

An S&P official does not believe that a Greek default event would necessarily lead to contagion in the Eurozone. However, we’ve seen the cascading effect play out many times in the past year or so. As much as the regulators want to tell themselves they don’t foresee a problem, one could be staring them in the face.

In fact, we may already by seeing contagion in the form of Portugal’s struggles.

IMF slashes world growth forecast

By Paul Handley (AFP)

3 hours ago

On Monday in Berlin, IMF managing director Christine Lagarde pressed European leaders to build a stronger backstop to prevent the problems in the continent’s weakest economies — Greece, Spain and Portugal — from pulling down others.

“We need a larger firewall,” she said. “Without it, countries like Italy and Spain that are fundamentally able to repay their debts could be forced into a solvency crisis by abnormal financing costs.”

The Fund warned against overly sharp budget-balancing by those countries that can afford to move slowly to reduce their deficits.

Otherwise, they will just create more drag on the global economy.

“Decreasing debt is a marathon, not a sprint,” said Olivier Blanchard, the IMF’s chief economist. “Going too fast will kill growth and further derail the recovery.”

The recommendation was pointed at Europe’s largest economies Germany, France and Britain, all of which it said would continue to grow this year, albeit at a weak pace.

Germany’s economy was seen growing 0.3 percent, France’s 0.2 percent, and Britain’s 0.6 percent.

The United States, the world’s largest economy, was projected to grow 1.8 percent in 2012.

The growth downgrades covered the entire world.

The Greek debt talks fall apart

Felix Salmon, Reuters

Jan 24, 2012 04:33 EST

Remember here that Greece itself is basically just an intermediary, stuck between the Troika (EU, ECB, IMF) on the one hand, which is going to fund its deficits for the foreseeable future and therefore can demand anything it wants, and bondholders, on the other. And the problem is that what’s acceptable to the bondholders – a 4% coupon, basically, on restructured debt – is unacceptable to the Troika.

In a way, this is a good thing, because it only serves to clarify the fact that Greece is defaulting in a way that’s going to make its bondholders very unhappy. All the talk of a “voluntary” restructuring was a way of attempting to paper over that fact, and that paper was always extremely thin. Maybe a bit of honesty will help people face up to reality in a way that they’ve been very reluctant to do until now.

No one thinks of this deal as a “one and done” restructuring. Bailing in the ECB or the EFSF at this point would just be denial: it would encourage the EU to think (or at least to say) that the Greek debt problem was solved for perpetuity, when it clearly isn’t. So let’s force the private sector to take its big NPV haircut now. And then the next step can come a few years down the road, when Greece discovers it can’t pay the Troika what it owes.

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