Thursday, March 1, 2012

ISDA: 75% Greek Haircut NOT A Default, Won't Trigger CDS Payouts

The ISDA has ruled today that a 75% haircut is NOT a default, and won't trigger credit default swap insurance payments, contracts written by Goldman Sachs, JP Morgan, etc.
SilverDoctors readers knew full well what the ISDA's decision would be a full month ago, as Jim Sinclair advised that a default decision by the ISDA was out of the question as the ISDA is composed of the very banks that would be decimated should they have to make good on their insurance promises.
Now that the ISDA decision has been made public, the consequences will intensify.  Look for an increased sell off in Eurozone debt, be it Portugal, Spain, Italy, or even France.  More than a few PIIGS debt holders may think twice now that they realize that their default insurance is worthless. 
Second, this should be the final nail in the coffin of the lucrative CDS market for the TBTF banks.  Who in the h*LL is going to purchase a new CDS instrument from GS or JPM after a 75% Greek default has been declared a non-event?  This means that one of the TBTF's main revenue sources is likely to dry up almost completely.  Good luck matching the 2011 year-end bonuses for 2012 Lloyd and Jamie.

Greece's latest bailout deal won't trigger payouts on credit-default swaps as no credit event has occurred, the International Swaps and Derivatives Association ruled.

The impact of the decision could reverberate beyond the narrow confines of the Greek debt market and could affect investors across other European bond markets and the holders of $2.9 trillion in CDS on government debt around the world.
On Monday, Standard & Poor's declared Greece to be in selective default because of recent moves under its restructuring, which asks investors to accept losses of roughly 75% on the face value of their bonds. That was cemented after Greece's parliament passed a law that could force investors to accept the restructuring, under so-called collective-action clauses.
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