Two Notes on Greek Debt Issue

I have two unrelated news items on the Greek debt. One indicates how the debt issue cannot be analyzed without reference to the banksters.

The other is an interesting development, one which would have been unthinkable even a decade ago.

First the banksters.

A Haircut is Not a Default: ISDA

On my last post on the Greek debt issue I mentioned the fact that International Swaps and Derivatives Association (ISDA), which is the professional body looking after Credit Default Swaps (CDS), has long refused to call any "haircut" to Greek sovereign debt, a trigger event. That is because declaring so would have forced banks that issued these derivatives to pay investors the full face value of the bonds they hold.

They have just issued a new ruling after the latest agreement on Greek debt:

As part of Greece’s restructuring, bondholders will be required to take a 70 percent loss on their holdings. When first announced, the deal was proposed as a voluntary exchange, which would not have activated the credit-default swaps. 

But in recent weeks, Greece has prepared to require all private bondholders to accept the losses through legal means. This would make the exchange involuntary and almost certainly set off the swaps. (...)

But so far I.S.D.A. has not been swayed. On Thursday, the organization said a committee had “unanimously determined” in both cases that a credit event did not occur. 

This is quite similar to you telling your bank that the fact that you only intend to pay half of your mortgage does not constitute a default on your part. And the bank cheerfully accepting this argument. Try it to see if that works for you.



This was the incredulous reaction of economist Barry Ritholtz:

The claim that Greece has not defaulted — despite refusing to make good on their obligations in full or on time — is utterly laughable. 

In order to get paid on a default, you need a committee to evaluate whether or not failing to make payments is a — WTF?!? — default?  Even more ridiculous, the committee is composed of biased, interested parties with positions in the aforementioned securities?

Speaking of the committee members, you can rest assured that there is absolutely no conflict of interest::

The 15-member I.S.D.A. committee behind the decision includes 10 banks that deal in derivatives and 5 asset management firms. For a decision to pass, it has to have the backing of at least 12 members. The I.S.D.A. says this prevents a situation where the banks alone can sway a vote. In the most recent Greek votes, all 15 members voted against activating the swaps.  

One question the process faces is whether committee members will vote according to their economic interest. Many of the banks on the committee have recently reported substantial exposure to swaps on Greek government bonds. For instance, Barclays, which voted against swaps activation on Thursday, had sold default protection on $5.92 billion of swaps on Greek debt, and bought $5.81 billion of protection, as of Sept. 30 last year, according to the European Banking Authority.

The reluctance of ISDA to acknowledge partial default is a good indication of the fear factor behind the massive exposure to CDS. This is precisely why I was suggesting that if I were the Greek Prime Minister I would threaten the EU and the global financial community with outright default.

A default is not something the ISDA can rule a non-trigger event.

And if others were to join Greece in this threat, you could kiss global finance goodbye.

New Greek Immigration

Can you guess where the newly unemployed Greeks are heading?

Watch the embedded clip. Instead of going to Berlin or London (as the reported notes in the video) they head out to Istanbul.

Apparently, 30 Greek pilots are already employed by the Turkish Airlines and Greek companies have been relocating to Turkey.

So far, only a few thousand Greeks in search of a job made the journey. But that is a start. And a very surprising one. As one of the academics who found a tenure position in Turkey remarked, such a notion would have been utterly unthinkable just a decade ago.

I hope the trend continues. If for nothing else, such a wave of immigration would help remove old hostilities and silly prejudices. A rapprochement brought about by mutual economic benefit is likely to be positive and long lasting.
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UPDATE:

From the Wall Street Journal:

Euro-zone governments have long feared that triggering CDS payouts could create contagion effects throughout the European banking system, similar to those caused by the 2008 global financial crisis. For that reason, officials took pains to come up with a debt restructuring plan for Greece that would be seen as voluntary.

Yet no one is even whispering what I suggested the other day about playing chicken with Eurozone governments.