French President Nicolas Sarkozy said a “breakthrough” had been made on the Greek debt crisis, following a meeting with German Chancellor Angela Merkel.
Ah yeah, the EU/IMF are going to pay Greece's bills through September.
EU leaders are aiming for a deal on Greece at a summit on June 23-24. The latest talk is for some kind of Vienna type initiative whereby a European Bank for Reconstruction and Development plays a role and private holders of debt can voluntarily participate. The "voluntary" aspect is critical. It is an attempt to prevent credit ratings agencies from declaring a default, which would trigger a CDS event, which would in turn cause a financial earthquake to ripple through parts of the bankster world as hundreds of billions in CDS payments would be then due.
> The "voluntary" aspect is critical. It is an attempt to prevent credit ratings agencies from declaring a default, which would trigger a CDS event, which would in turn cause a financial earthquake to ripple through parts of the bankster world as hundreds of billions in CDS payments would be then due.
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Such brazen manipulation. Why don't we just declare all bad bets, globally, null and void? Then the pain will go away...
Who writes CDS' and who accepts them as valuable? It seems to me that default swaps on any large issuer must never be paid. Is the real value that it is like a suicide threat? With these swaps a default will destroy the entire world's financial system, do this debt is as good as gold. The few who can still muster resources, the US and German governments, will have to make the debt good to save the world from destruction. They can never be called on. Why do we allow issuers to collect a premium and pocket it?
ReplyDeleteThose CDS contracts are OTC and often bespoke, and the boilerplate language regarding the definition of "default" can vary from underwriter to underwriter. According to a recent Mauldin article, it is the US underwriters that have the most exposure (56%) to Euro CDS contracts. The Europeans have about 43% exposure, so they're not going to shoot themselves in the foot. But if they wanted to turn the screws on any US underwriter in particular that used sloppy legal definitions, they could easily do so. Or, a competitor might press the issue. Now, who might that be? It would be an easy way to extract windfall payments without too much systemic shock.
ReplyDelete@munger: The Fed set the precedent with AIG that any sudden and large derivative payment that comes due will be paid out at par by the central bank itself. With AIG, the contracts were primarily on subprime CDOs, but the concept is the same.
The CDS market is relatively small compared to foreign exchange and interest rate swap derivatives. Those are the $400 trillion elephants in the room. The Fed and ECB will ultimately make good on those bets as well, but only to save the big banks from destruction, not the world. The world would be better off with them gone, but that won't happen.
The purpose of inflation is to keep all these notional, paper bets from going bad. Even if it ends in hyperinflation, the elite are much better off than they would be were the bets be allowed to fail. They get the newly printed money first and are hurt least by the inflation. Plus, they've been stockpiling gold, which will play a much greater public roll in our monetary future.
I've been advised that there are not many outstanding CDS contracts that do not conform to ISDA definitions. A good discussion of the "voluntary" issue is here:
ReplyDeletehttp://tfmarketadvisors.blogspot.com/2011/06/restructuring-credit-event-and.html