Friday, March 9, 2012

Bomb Triggered: ISDA Determines Greek Restructuring A Credit Event

The most important news for the financial markets in three full years just crossed the tape:

The ISDA has determined that the Greek debt restructuring has been deemed a "Credit Event."  This means that the insurance payments on the debt, known as Credit Default Swaps (CDS), will be paid in full.
For an easy to understand explanation of what all this means please see The Greece Bailout: Do Not Trigger The Bomb.

The bomb has been triggered.  As I discussed in the article linked above, this is important not due to the size of the Greece CDS contracts outstanding, currently around $3 billion in size, but because it sets the precedent for the coming bailouts for Portugal, Ireland, Spain, and Italy.

These countries have a debt crisis, and CDS contracts outstanding, orders of magnitude larger than Greece.

Many of the banks and hedge funds that issued these insurance contracts did so knowing that they did not have the capital to pay them out if they were ever triggered.

American banks, for example, have told us countless times that their exposure to European debt is very low because they are "hedged."  They are hedged because if a bond defaults, they know they have X amount of dollars coming in through insurance payments (CDS contracts).

But what if the bank or hedge fund that sold them the insurance could not make the payment?  This is exactly what happened when Lehman brothers failed and everyone showed up to AIG's office to collect their CDS contract payments.  There was a note on the front door that read:

"We knew that if the bonds defaulted then we would have to pay out $200 billion, but we only kept $2 billion in reserves. We didn't think home prices would fall in value. We're sorry."

Remember what happened then?  The entire financial system collapsed and it took close to $20 trillion in backstops from the Federal Reserve to keep the system alive.

Here is what makes the story even more fun:

CDS contracts are held "off balance sheet," which means no one knows who owns them or how much they own.  The financial system becomes a minefield that you must navigate wearing a blind fold.

So what happens?  No one trusts anyone.  Money stops moving.

This is why after almost $1.4 trillion in money was injected from the European Central Bank over the last three months, almost all of it has moved immediately back onto the balance sheet at the ECB for safe keeping.  The money is not moving because the banks are scared to death.

The implications for this announcement are beyond massive.  Remember that behind Europe we have Japan waiting in the wings - a monster that is larger in scale than both Italy and Spain.  Investors now have the green light to pounce on Japanese debt through insurance contracts knowing that they will be paid out when the collapse arrives.

What happens next is obviously impossible to know.  If a CDS writer can not make a payment, will the central banks step in and make those payments the way they did with AIG?  The size of the contract payouts for the rest of the European contracts will make the 2008 bailout look like a walk in the park.

This process will take a long time to unfold but we received an enormous piece of information today to help us create the road map for what is ahead.  Right now it is time to raise cash and prepare for when assets go on sale.

I will have much much more coming on this news, including in depth analysis on the size of the CDS markets, which banks and hedge funds will be impacted the most, and an estimate of the scope of the coming bailout (printed money) that will be needed to bailout the system.

For an in depth look at the United States credit markets see: Credit Growth Rising: Trade Deficit Soaring: Student Loan Bubble Expanding.


  1. My only concern is that the ISDA's voting members are all banksters. So why would they do this if they didn't have something planned under the rug to save themselves?

    Smells fishy. I think this was contrived and tons of backroom deals are now being done. I don't for a second buy the news because these bankster whores are running the whole show and controlling what constitutes default, etc...

    1. Agree. It is interesting that they have come out with multiple LTRO programs in advance of this announcement. Their plan is obviously to shore up bank capital (while sacrificing everything else) in advance of this coming storm. I think they have easily covered the damage done with the Greece default, and they may already be ahead of the damages coming in the Portugal crisis, but they have not done enough yet for Spain or Italy. They will need a full scale QE program to counter the size of a default from either country.

    2. Because if the alternate happened (the ISDA saying no credit event), all CDS would become worthless instantly and that would bring the whole thing to a quick halt... overnight.

      This way buys them a bit of time, and they're guaranteed to be backstopped by the Fed and the ECB, so party on, right?

  2. Look, The Bank of England (i.e. Rothchild's) has engineered this whole clusterf*ck through derivatives. As Soros, is as imbalanced backwards as forwards, stated recently "The Dollar will necessarily need to have a 'Orderly' decline".

    These evil turds would sell their Mother's, Sister's, Wives, and Daughter's without the least of thought, in order to enrich themselves, for that fleeting moment that they occupy the space in where they exist. Never thinking beyond their miniscule life, a blink, a breath against the backdrop of eternity.

    God forgive their miserable, wretched carcasses as they rot in Hell...

  3. Both previous posts are true but the TRUE AND FINAL GOAL OF THE ROTHCHILDS IS to have the WORLD as a tax base, why lend to a single government when you can lend to a world government who has as tax base. TO do this you must break the current system down and re build it, just like what happened after WW1 (the time of kings ended), WW2 the rise of the UN..WW3 (financial war) the rise of World Government..and a world tax base

    1. It appears right now that the central banks have everything in control, but you have to remember that on the Thursday after Lehman Brothers failed we were only hours away from the entire financial system melting down. Perhaps they can make it through the entire European bailout without political unrest, but it seems very unlikely. The public is getting much wiser to what is taking place due to discussions like this spreading on the internet. For example, there is no political will in America right now for any sort of bailout anywhere (imagine trying to launch another TARP program), so the Fed now has the entire American banking system on its shoulders while it is staring down $110 oil and rising food prices. Something will break somewhere, and there will be chaos before a new monetary system is formed.

  4. Nice summaries - to answer Anonymous 3:36 p.m.: "So why would they do this if they didn't have something planned under the rug to save themselves?"

    Simply stated - NO CHOICE! If they declared no CDS trigger on this event, any "subprime" sovereign would have no chance of raising capital for under 1000% per annum, because there is no effective default insurance. Cost of funds goes skywards, total societal chaos. Banksters lose.

    It was the Prisoner's Dilemma writ large - they had to invoke a CDS trigger. It remains to be seen how this plays out in the next few weeks with counter-party defaults to the CDS system. I have heard that the total worldwide gross CDS exposure is 1500 Trilion (yes, with a "T").

    This is not an engineered scenario - it is a complete clusterfuck, and no-one has an over arching plan or scheme.

    1. Excellent point. If the CDS were not triggered all "hedges" would have been removed and the only hedge would be to sell bonds as quickly as possible. This is a pawn move in a much larger chess game, but it was a huge move.

  5. I just found this site, thanks to a commenter a zerohedge. Thank you for the sheer clarity. Well done.


  6. Well, not "triggering the bomb" would have had an even worse outcome: if after what happened to Greece, the ISDA did not trigger the CDS, everyone would have realized that all the CDS out there are just worthless... The CDS business would have died literally overnight: not good for the big banks business, that own most of the CDS business.
    By doing so, they're promoting their CDS business model, saying: 'Hey, you see our insurance/hedge is awesome'. Of course, expect all new CDS contracts having a substantial amount of new pages...
    Now, what will be "fun", is to see if they can "contain" (for real huh, not Lehman style...) the CDS outstanding, should Ireland, Portugal and Spain default, and that, they eventually will, you can count on it...
    But at least they are buying more time and can suck more money in CDS until all hell breaks loose...
    Just my 2 cents anyway...

  7. Agree. See comment above. In order to contain it the Fed is going to have to open the swap lines full throttle with the ECB to pump cash into their banking system. What's funny is this round of QE, even though it will be larger than the previous rounds, will probably go unnoticed (unless you are watching the swap lines). I imagine that the gold market will sniff it out quickly after a brief downdraft during any liquidations.

  8. " CDS contracts are held "off balance sheet," "

    are you sure??? doesn´t that just apply for hedge funds?
    ..i think banks have to show their CDS exposure in their balance sheets (presupposed accounting accordance with IFRS..not so sure about US-GAAP though)

  9. This article has been very enlightening. To be honest though - forgive for I am not an analyst or have not the knowledge - I still have not understood why the triggered Greek CDS are a bomb that went off.
    The ISDA estimates the exposure of Greek CDS sellers is about EUR3.2bn. Some comments imply that this is an amount that they can afford. Is that not correct?
    Or is it because this situation will act as a model for the Italy/Spain bailouts and it suggests that the CDS for those countries will be surely triggered as well creating thus a domino?
    Thanks for the help