ISDA Declares Greek Default not a Default Just Yet –  Bill Gross Feigns Outrage

Below is our customary collection of charts,  updating the usual suspects: CDS on various sovereign debtors and banks, bond yields, euro basis swaps and a few other charts. Charts and price scales are color coded (readers should keep the different scales in mind when assessing 4-in-1 charts). Prices are as of Wednesday's close.

Amazingly, ISDA has determined today that no 'credit event' has occurred yet in Greece. Some of the recent CDS buyers may well end up disappointed – or not (read on). This is not the 'final' verdict as it were, as a credit event may yet be declared after the CAC's (collective action clauses)  are triggered.

There is of course a danger that CDS on sovereign debt will cease to be a viable hedging product, something we have discussed several times in the past. If so, get ready for a plethora of unintended consequences to manifest themselves.

Reuters reports that Bill Gross is publicly aghast at today's decision – in spite of the fact that PIMCO actually backed ISDA's move!


Bill Gross, co-chief investment officer at PIMCO, on Thursday took issue with a derivative panel's decision that the restructuring of Greek debt does not trigger a payout on insurance protection, even after his firm backed the move.

Bond giant PIMCO was one of 15 banks, hedge funds, and asset managers in the International Swaps and Derivatives Association that voted on Thursday against declaring the restructuring a credit event that would trigger a payout on credit default swaps.

"If I were a buyer of protection on Greece and have seen the result this morning in terms of no protection, then I would be upset," Gross, manager of the world's largest bond fund, said on CNBC television of the ISDA's decision. The decision prevents credit default swap insurance payments from being triggered. The net worth of these contracts is $3.25 billion.”


(emphasis added)

Well…huh? WTF?

Meanwhile, not all is apparently lost just yet:


Greece has not yet triggered payment on controversial bond insurance contracts but market participants still expect Athens' efforts to reduce its debt burden to prompt an eventual payout on credit default swaps.

The International Swaps and Derivatives Association decided on Thursday that Greece had not breached the terms of the insurance contracts by preparing to force losses on private bondholders while exempting official creditors.

However, the story does not end there and holders of the net $3.25 billion in default insurance contracts must wait and see if the next steps in the largest-ever sovereign restructuring will lead to a payout.

"The situation in the Hellenic Republic is still evolving and today's EMEA (determinations committee) decisions do not affect the right or ability of market participants to submit further questions," ISDA said in a statement.

Market participants still expect a 'credit event' will be declared to trigger CDS payments in the coming weeks. They believe Greece will have to use recently-approved collective action clause (CAC) legislation that allows them to force unwilling bondholders to swap their Greek bonds for new ones worth much less.

"We always thought that ISDA would declare a credit event after the CACs are activated. That won't happen before March 9 when Greece will know the participation rate in the (bond swap) and will have the opportunity to trigger the CACs," said Nikolaos Panigirtzoglou, a strategist with JPMorgan. "Until then we're not going to have a credit event – that's what the consensus is."


So the likely triggering of the CAC's will probably still lead to a payout – the market may yet dodge this particular bullet in other words.

Meanwhile, CDS on Portugal have also begun to move higher again.



5 year CDS on Portugal, Italy, Greece and Spain – click chart for better resolution.



5 year CDS on France, Belgium, Ireland and Japan – click chart for better resolution.



5 year CDS on Bulgaria, Croatia, Hungary and Austria – a growing divergence – click chart for better resolution.



5 year CDS on Latvia, Lithuania, Slovenia and Slovakia – click chart for better resolution.



5 year CDS on Romania, Poland,  Ukraine and Estonia – click chart for better resolution.



5 year CDS on Bahrain, Saudi Arabia, Morocco and Turkey – mixed bag – click chart for better resolution.



5 year CDS on Germany, the US and the Markit SovX index of CDS on 19 Western European sovereigns – SovX still levitating, presumably due to the huge move up in CDS on Greece – click chart for better resolution.



Three month, one year, three year and five year euro basis swaps – looking better again, which is good for gold – click chart for better resolution.



Our proprietary unweighted index of 5 year CDS on eight major European banks (BBVA, Banca Monte dei Paschi di Siena, Societe Generale, BNP Paribas, Deutsche Bank, UBS, Intesa Sanpaolo and Unicredito)  – once again a tad lower following the February LTRO – click chart for better resolution.



5 year CDS on two big Austrian banks, Erstebank and Raiffeisen – looking much better now – click chart for better resolution.



10 year government bond yields of Italy, Greece, Portugal and Spain – it's Portugal's turn in the barrel now – click chart for better resolution.



UK gilts, Austria's 10 year government bond yield, Ireland's 9 year government bond yield and the Greek 2 year note – click chart for better resolution.



5 year CDS on Australia's 'Big Four' banks – still going nowhere – click chart for better resolution.



The SPX, the gold-silver ratio, and T.R.'s proprietary volatility indicator (the AU/AG ratio adjusted VIX). There is a slight bearish divergence between the volatility indicator and the SPX now – click chart for better resolution.




Charts by: Bloomberg



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One Response to “No ‘Credit Event’ in Greece Just Yet – Credit Market Watch, March 1”

  • jfraasch:

    Tell me I’m not the only one that see the fallout from this not triggering CDS. It would seem to me two things will happen:

    1) The value of CDS will go down significantly. If your insurance is not triggered until you are forced to take a more than 75% cut in bond payments, then effectively that should reduce the value of the CDS.
    2) Since CDS triggers will not happen until you are already out 75%, it would seem to me that private investors would be less likely to participate in future bond auctions leaving the government as the last and only buyer of sovereign debt instruments. The risk of losing 75% of your investment and not having any way to insure against such loss should make private investors scramble for the exits.

    This is not going to end well.


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