A (Greek) Default By Any Other Name

Back in October I wrote about the impact of an impeding Greek default on the CDS market. I concluded that in the shadow of Dodd-Frank, the decision on whether the Greek bailout triggered a CS payout was a minimal consequence.greece5086

With ISDA’s announcement that the European Central Bank’s fix to the Greek bond crisis will not cause CDS contracts to pay out, it seems we will quickly find out how right or wrong I am.

Economically, the announcement today is of minor consequence. According to the Wall Street Journal, the maximum payout would be only $3.2 billion. That amount is certainly not on the radar of systemic risk watchers.

The real issue here is the viability of sovereign CDS. If the market is now left thinking that anytime a sovereign default is inevitable the relevant regulators will structure the event in such a way that it is not technically a default, why buy the CDS at all?

I suspect many of us feel this way about auto insurance – if your policy won’t pay unless your car crash happened on a dirt road on a Tuesday between 11 a.m and 12 p.m., what’s the use? Seems we might be in that place for sovereign CDS.

Rather than reiterate my thoughts, I wanted to bring back attention to the piece I wrote in October: Greece Won’t Kill CDS, Dodd-Frank Will.

My comments on the subject were also picked up by the Wall Street Journal: “CDS, Huh. What It Is Good For? Absolutely Nothin?”  Read their coverage at WSJ.com.


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