Saturday, March 10, 2012

Greek Credit Default Swaps ARE Going to Be Payed Out


Greek Credit-Default Swaps Are Activated

By PETER EAVIS March 9, 2012, 2:57 pm
Angelos Tzortzinis/Bloomberg News.

[excerpted] "Greece’s debt restructuring will prompt payouts on credit-default swaps tied to the country’s government bonds.
The decision by the International Swaps and Derivatives Association ends months of speculation that a Greek default might not set off the swaps, a result that could have undermined their role as insurance against debt defaults.
“We saw today that the credit-default swap market worked,” said the association’s chief executive, Robert Pickel. “Market participants expected it to work.”
....Nearly $70 billion of swaps are currently outstanding on Greek debt..."

Majia here: I have posted on this previously. According to the reports I found, AIG is going to be the number one agent exposed to the liabilities posed by the payout of credit default swaps.
One does not have to actually hold Greek bonds to purchase Greek credit default swaps.
So, JP Morgan (which helped Greece hide its debt) probably holds lots and lots of credit default swaps on Greek debts, but may very well hold NO Greek Sovereign Bonds.
The decision to pay out on Greek credit default swaps will mean that AIG and other insurers will be paying to agents like JP Morgan who bet on, and may have helped exacerbate, Greece's default.
The US government will once again have to come to AIG's aid to make good these unregulated credit default swap agreements that AIG sold without reserves.
Holders of Greek Sovereign Bonds are expected to take a significant "haircut"  (losses) on their holdings. 
What % markdown will holders of Greek credit default swaps be expected to take?
My feeling is that these holders shouldn't be payed out at all given their role in exacerbating the Greek crisis.

Background on the Payout of Greek Credit Default Swaps


AIG will be exposed in the event of a ruling in favor of payouts.
http://majiasblog.blogspot.com/2012/02/wsj-s-declares-greece-in-default.html

Background on Credit Default Swaps as Weapon Against Greece
http://majiasblog.blogspot.com/2010/02/did-goldman-use-credit-default-swaps.html
http://majiasblog.blogspot.com/2011/08/financial-warfare-using-high-frequency.html

Background on the Use of Derivatives in Causing the Financial Crisis


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