Econintersect: The “voluntary” haircuts for European banks have been deemed by the European heads of states to be not an event that would trigger CDS on Greek sovereign debt. CDS are Credit Default Swaps, essentially insurance bought by one party and sold by another that requires the insurer party to pay the insured party in the event that a given failure to complete a financial obligation occurs. The problem with the position of the European governments is that it ignores the nightmare web of interrelationships that the arcane and dark world of CDS exchanges entail.GEI contributor Elliott Morrs has examined the CDS question. Dr. Morss finds the issue of CDS liability is far from the simple position presumed established by the EU government meetings last week. Part of the problem arises because the banks that may “voluntarily” accept the 50% haircuts agreed upon are not the only affected parties. The web of interrelationships is complex. The following graphic only starts to explain the reasons.
Click on graphic for larger image.
The banks are only a small fraction of possible CDS holders. They may hold a large proportion but how many holders of Greek debt outside of the large banks and how many will have independent CDS positions?
Dr. Morss quotes an unnamed senior risk assessment officer at a major U.S. bank:
Very much a managed process (gun to the bank CEO’s head) to insure it was “voluntary”. But I do not think that is the end of the story.”
So “voluntary” may fail the test of legitimacy and the CDS exposures may be significant from distributed bond holders as well. As Dr. Morss writes:
It is probably a good time for US and European financial lawyers. A very messy business.
Source: GEI Opinion Blog
