ISDA

Greece on the Edge

greece ruinsGreece is on the edge. Part of their bail out, the voluntary losses Greek bond holders were supposed to accept, is falling short.

Private holders of €206bn in Greek bonds have until Thursday evening to decide whether to take part in a swap where they would trade bonds for a package of bonds and cash that would knock about €100bn off Athens’ debts.

Greece must get 75 per cent of holders to participate to avoid forcing the deal on holdouts through so-called “collective action clauses” which were inserted retroactively into Greek bonds by the government last week. If less than 66 per cent participate, even the CACs would become invalid, scuppering the entire deal.

The ECB is already saying voluntary participation will be too low and now there is talk of forcing the holders of Greek debt to take their haircut:

Greece expects bondholders to accept a one-time offer to write off about 100 billion euros ($140 billion) of Greek debt and is ready to force them to participate if necessary, Finance Minister Evangelos Venizelos said.

When Even the Clearing Houses Start to Malfunction

Financial markets rise and fall based on the perceived value of the products being sold. But there are occasions when market value is affected by the condition of the marketplace itself, and whether the infrastructure that supports the market is structurally sound. This is the situation investors are now facing. There is rottenness apparent in even the largest and most trusted markets, like the US Treasury market, and investors are beginning to question how safe their funds are, or whether the protection being bought is worth anything. Private money is nervous, or it is fleeing the markets altogether. When so many different markets are afflicted by the same creeping structural weakness, it is no surprise that the average investor begins to ask whether Financial Armageddon may be upon us.

There are a number of recent cases where the “system” did not work the way investors expected, especially in the case of the collapse of MF Global, and the less-publicized ruling that banks would not have to pay out the protection they sold investors who bought credit default swaps covering a potential Greek government default. Before we turn to these specific and highly consequential events, we should look at the some of the precedents which reveal a history of rule-changing by banks and regulators that inevitably has worked against the interest of investors.

Rules Can be Changed for the Benefit of the Market Makers