Investorstoday

Friday, March 2, 2012

So What Qualifies as a Credit Event?

Yesterday, the International Swaps and Derivatives Association ruled that the Greek debt restructuring comprised of a 70%+ writedown, subordination of the private to the public holders, and retroactive insertion of a Collective Action Clause.

The total amount of CDS contracts outstanding is estimated at slightly more than $3 billion dollars so this will not cause much more than a ripple in the financial markets.  By not calling the debt restructuring a credit event the ISDA has a dangerous precedent.  We have already seen the problems caused by rehypothecation at MF Global and now the EU, IMF, and ECB are being allowed to run roughshod over the ISDA and the ISDA agreement.

These two combined events have undermined the confidence of investors in the global stock markets.  If one cannot trust that the amounts held in their respective brokerage accounts will be treated fairly and credit agreements are not upheld why should investors put money into the stock markets?

The EU, IMF, and ECB have already created a bifurcated market for sovereign debt where public and private holders will be treated differently and it is this bifurcation that will drive yields higher.

If Greek debt is allowed to be restructured at an interest rate of under 4%, public and private holders treated differently, and private holders cannot hedge their holdings in the CDS markets then why should anyone outside of the pension funds, ECB, and IMF invest in any European debt?

The decision to not call the Greek debt restructuring a credit event has  done more than allow the EU, ECB, and IMF to run roughshod over the sovereign debt markets, it puts the trust of the entire financial markets at risk once again.

What does this say for a nation like Portugal who has followed their austerity program and continues to run into problems? 

Greece fudged their books to get into the EU, decided they needed a bailout by the EU, failed to follow their austerity program, and came back for a second bailout.

If the actions by Greece, the IMF, ECB, and EU are not considered a credit event look for more sovereign defaults in the future as nations realize that the best way to solve their debt problems is to follow the Greek plan and circumvent their individual bond language and covenants.






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Two weeks ago I did an interview with investortoday.ca on 2012.  For those regular readers I am more bullish there than my general commentary for good reason.  Please feel free to check it out and as a reminder the 2012 Investment Forecast is now available.


The 2012 Investment Forecast is now available!!!!
Thank you for your patience. 
The 2012 Investment Forecast is finally finished and ready for sale.  My apologies for the final week’s delay as my original outlet caused some unnecessary consternation forcing me to seek a different outlet.
I am pleased to say that the 2012 Investment Forecast is available through smartwords.com, the world’s largest independent ebook distributor, by clicking here.
Smartwords distributes to Apple, Barnes & Noble, Sony, Kobo, Diesel, and others along with instructions on downloading to your Kindle meaning that this and future work will be available in multiple formats from mobi to ebook to pdf. 
As a sign of forgiveness for being so late I am dropping the price from $20 to $15.  Quarterly commentaries will be priced at $5 while next year the yearly forecast will return to $20. 
If you wish to place a banner ad and help distribute the 2012 Investment Forecast and future works I am offering a 25% commission on all sales.  You can find more information here:  http://www.smashwords.com/about/affiliate


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