Greece defaults • Hacker News Board

Re: Greece defaults

#141

Post by mdda » Sat, Jul 23, 2011, 3:57 AM UTC

tankenmate wrote: post #136

abrenzel wrote: post #127

Earlier quoted context omitted.

Absolutely. Indeed risk is not even just about the "customer's" (in this case, the nation of Greece) inability to pay, but also counterparty risk. It's not just Deutschebank that's on the hook for defaulted Greek debt, but every counterparty who wrote them credit default swaps (CDS) on that debt. That's what triggered the financial crisis in 2008 - as Bear Stearns' and Lehman Brothers' cash flow from their debt holdi…

There is a good solution, namely this, transparency. Just like the law requires manufacturers of food to label what goes into the box, so sellers of aggregated derivatives should label what goes into their CDOs, CDSs, etc. This would enable to buyer to have half a chance at assessing the risk attached. Seller won't do this however until they are forced to do it because they don't want to say what is in the secret sau…

But the contents of each CDO and CDS was/is completely transparent to the buyer and seller. Maybe the buyers were less sophisticated than the sellers, but that's really too convenient an excuse. The whole CDO construction process was openly called 'Ratings Arbitrage' after all.

I agree that things should be transparent : And so the right thing to do is to force all CDS to clear vs. a central counterparty, with publicly known mark-to-market pricing. Similarly, banks should be required to mark-to-market on an arms-length basis. But somehow this legislation never gets passed...

Re: Greece defaults

#142

Post by mdda » Sat, Jul 23, 2011, 3:59 AM UTC

ry0ohki wrote: post #101

RyanMcGreal wrote: post #97

Earlier quoted context omitted.

> Are there many developed countries where father, son and grand-son, or uncle and nephew ALL become PMs in the past 30 years? The United States springs to mind: George H.R. Bush, Jeb Bush, George W. Bush.

To be fair Jeb Bush hasn't been president, and there are relatively few dynasties in the US (there's also the Kennedy's, the Gore's, the Paul's, but most don't make it to be President)

Funnily enough, this occurs much less in UK politics.

Re: Greece defaults

#143

Post by mdda » Sat, Jul 23, 2011, 4:05 AM UTC

_delirium wrote: post #119

illumin8 wrote: post #109

Earlier quoted context omitted.

Right, the headline is a little dramatic. I think the ECB was extremely careful in the crafting of this deal to do everything possible to NOT trigger a technical default. A default is a delay or missing any coupon (interest) payments or failing to pay back a bond upon it's redemption date. The reason why it is so important that Greece not default is that a huge amount of hedge funds and other speculative investors ha…

An interesting angle along those lines is: given the mostly unregulated nature of the CDS market, do they even all have the same conditions for "default"? Is it possible that some CDS contracts are worded more liberally than others?

Yes, though the ISDA docs have standardized most of it.

But there are also a couple of major types of contract. (a) if there's a Credit Event, the protection seller pays 100 for the distressed debt (essentially taking a loss equal to however much the value of the debt fell). (b) if there's a Credit Event, the protection seller pays EUR40 (fixed payout, with a specific 60% recovery assumption).

By playing on the mix of these CDS, people are probably already be playing on the post default value of Greek Debt, even before anything has formally happened. My guess is that process started over a year ago.

Re: Greece defaults

#144

Post by mdda » Sat, Jul 23, 2011, 4:09 AM UTC

_delirium wrote: post #117

richardw wrote: post #81

Earlier quoted context omitted.

The ratings agencies have said that arm-twisting bondholders to accept new bonds with less favourable conditions amounts to a default. I promise to pay you $100 tomorrow. I then tell you you'll get your money in 30 years and at a much lower interest rate. That's breaking the original promise, even though I haven't actually 'not paid you back'.

I don't think it's a default in that example until tomorrow comes and I fail to hand over the $100. Until then we're just negotiating and speculating about whether I will or won't hand it over.

Then people with an interest in Greece defaulting will buy a small amount of all the short-term debt they can find, and play hardball as it comes due.

Re: Greece defaults

#145

Post by richardw » Sat, Jul 23, 2011, 9:03 AM UTC

joe_the_user wrote: post #133

richardw wrote: post #81

Earlier quoted context omitted.

The ratings agencies have said that arm-twisting bondholders to accept new bonds with less favourable conditions amounts to a default. I promise to pay you $100 tomorrow. I then tell you you'll get your money in 30 years and at a much lower interest rate. That's breaking the original promise, even though I haven't actually 'not paid you back'.

Again, you can call X "effective default" or say X "amounts to default" all you want and I wouldn't argue with your definition. But since the OP called default an absolute binary, then if we want that , we have to wait till we have literal default. IE, what I tell you doesn't matter, we have to wait till it is tomorrow and I haven't paid. The point is that in an "effective default", there's no violation of any explic…

Sure. I was saying that the important point is that the _ratings agencies_ call it a default. Your and my (and the OP's) definition isn't important. If they think it's a default then for a percentage of the world (who need ratings agencies' support), it's binary-on.

Another agency, the ISDA, says it's _not_ a default for the purposes of a CDS trigger. That, for another percentage of the population, is binary-off. http://blogs.reuters.com/felix-salmon/2011/07/22/the-cds-mar...

Re: Greece defaults

#146

Post by achompas » Sat, Jul 23, 2011, 5:53 PM UTC

ebaysucks wrote: post #85

nostrademons wrote: post #76

Earlier quoted context omitted.

That's how a rational person would respond. History has shown that markets are anything but rational. Usually, when something like this happens, people wonder how deep the iceberg goes and who'll be next. Widespread panic usually follows.

There's nothing irrational about wondering how deep the iceberg goes. I'm always amused when people blaim the market for pointing out failed assets, as if the process of price discovery itself is more responsible for intrinsic value than the nature of the asset itself.

Totally agreed. Markets moved up, but a decline of the various indices would be justified: Greece will need another bailout, as this "partial default" only deals with a little over half of Greece's outstanding debt. They still have 140 million Euros to go.

Re: Greece defaults

#147

Post by achompas » Sat, Jul 23, 2011, 5:56 PM UTC

mdda wrote: post #140

tomkarlo wrote: post #137

Earlier quoted context omitted.

Unless the notes were a large portion of your portfolio, it's not a problem. Given the relative size of Greece to the rest of the EU, unless you were running the "Greek Debt Investment Fund" you're still probably better off helping to prevent contagion and your lenders are too.

But... If I'm a hedge fund, why even own Greek debt plus the insurance? Just buy the insurance, and burn Greece. I'd also be buying (CDS) on other tipping-point countries, and watching the knock-on effect. Ah : But that demonstrates how terrible CDS is, and how amoral hedge funds are. Actually (IMHO) the fact that Greek CDS was so cheap to buy was just an indication of how little trust people have that politicians re…

But... If I'm a hedge fund, why even own Greek debt plus the insurance?

CDSes are generally used to hedge a position. If a hedge fund holds both Greek bonds and CDSes on those bonds, they come out ahead regardless of what happens to Greece.

Re: Greece defaults

#148

Post by tomkarlo » Sun, Jul 24, 2011, 8:36 PM UTC

mdda wrote: post #140

tomkarlo wrote: post #137

Earlier quoted context omitted.

Unless the notes were a large portion of your portfolio, it's not a problem. Given the relative size of Greece to the rest of the EU, unless you were running the "Greek Debt Investment Fund" you're still probably better off helping to prevent contagion and your lenders are too.

But... If I'm a hedge fund, why even own Greek debt plus the insurance? Just buy the insurance, and burn Greece. I'd also be buying (CDS) on other tipping-point countries, and watching the knock-on effect. Ah : But that demonstrates how terrible CDS is, and how amoral hedge funds are. Actually (IMHO) the fact that Greek CDS was so cheap to buy was just an indication of how little trust people have that politicians re…

Why is buying unhedged CDS an amoral act? Is shorting a stock amoral? You shouldn't have to own a security to buy the default insurance on it, any more than you should have to buy a stock to own puts on it. It's a contract between two educated and willing counterparties.

A bank might be short Greek debt because of other trading positions, and want to sell Greek CDS to balance that position. Restricting who can buy that security hinders it being priced right.

Re: Greece defaults

#149

Post by [deleted] » Mon, Jul 25, 2011, 1:34 AM UTC

mdda wrote: post #48

marshray wrote: post #35

Earlier quoted context omitted.

You can bet there are a lot of people making phone calls right now trying to figure this out. My guess is that nobody knows at this point. If this so-called "selective default" does end up being "structured" such that markets are surprised when CDSs cannot actually be invoked, then that erosion of confidence in the system itself might end up fueling a cascade failure even worse than simple direct failure of some insu…

If I were worried about this point (and a holder of a lot on CDS 'insured' bonds), I'd get a friend that was immune to 'arm twisting' to buy 1MM of a particular issue, and play extremely hardball with the ECB. Eventually, a payment would not occur, and there would be a solid 'Credit Event' to trigger all the CDS.

[deleted]

Re: Greece defaults

#150

Post by mdda » Wed, Jul 27, 2011, 6:32 PM UTC

tomkarlo wrote: post #148

mdda wrote: post #140

Earlier quoted context omitted.

But... If I'm a hedge fund, why even own Greek debt plus the insurance? Just buy the insurance, and burn Greece. I'd also be buying (CDS) on other tipping-point countries, and watching the knock-on effect. Ah : But that demonstrates how terrible CDS is, and how amoral hedge funds are. Actually (IMHO) the fact that Greek CDS was so cheap to buy was just an indication of how little trust people have that politicians re…

Why is buying unhedged CDS an amoral act? Is shorting a stock amoral? You shouldn't have to own a security to buy the default insurance on it, any more than you should have to buy a stock to own puts on it. It's a contract between two educated and willing counterparties. A bank might be short Greek debt because of other trading positions, and want to sell Greek CDS to balance that position. Restricting who can buy th…

I actually stated the opposite : People might use this as an example of how amoral hedgefunds are, but it turns out that they are just more clearsighted. Ditto shorting, HFT, etc.