Tuesday, 6 March 2012

Greek default risk rises

The FT published an excellent piece on Monday on how the EU shenanigans has effectively wrecked the CDS bond default insurance market

I quote fom this piece

"Last Thursday’s “no default vote” by the determination committee of Isda, the trade body that represents the derivatives industry, means investors holding CDS may be paid less than they had hoped.

This could, therefore, deter bankers and investors from buying the instruments, jeopardising the future of the product, say traders. It could also prompt some funds and banks to sell peripheral eurozone bonds as they can no longer be sure of the instruments used to hedge the risk of holding the debt."

Its the old story. Insurers are happy to take your premiums but its a different story but when you have to make a claim. That's when you find out how good a credit your counterparty is. The reputation of the City of London was built on the reputation of the Lloyds insurance market always to pay. It did for the San Francisco earthquake and fire of 1906 and did for last year's earthquakes in New Zealand and Japan. 

Evading your liabilities is not just an EU practice its very common in the USA where large corporations employ huge teams of expensive lawyers to evade payment. Obama's disgusting emphasis of the word British in his press conferences on the Gulf oil spill shows how deeply ingrained this practice is in the US. When the American owned Piper Alpha rig went on fire in 1988  in the North Sea killing 167 people our PM Mrs Thatcher made no reference to the nationality of the owners, She treated it for what is was, an accident warranting a full investigation.

I was proud of Mrs T then as I was proud of Tony Hayward recently when he was being hounded by the low life that inhabits the US political system seeking to make political capital from a tragic accident. Neither sought to hide behind jingoism or lawyers.

The City has another excellent mechanism of default insurance called three name paper. When Baring's went bankrupt for almost £2 bn that system paid up without a quibble. Only those in the markets knew who paid or even how three name paper works for corporate debt..

CDS were widely used as credit insurance. If it is so easy to evade paying as the Greeks seem intent on demonstrating then people will be very wary of using them in future and the cost of borrowing will rise.

The FTSE was down 2% at cob today as the probability of a Greek debt default increased. Much publicity has been given to Greek and Eurozone banks accepting the draconian write down Merkel's plan entails. Its clearly in their interests and the interests of their politicians to do so but its what private bond holders  do that will decide. If they don't buy the deal then its a default and lots of Eurozone banks are bust and will need recapitalising by their governments very quickly. The ECB will take a huge hit.

Thursday will be an interesting day!

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