Monday, March 12, 2012

Gold and the CDS Fiasco

Is it or isn't it a default? Is there $37 Trillion (Jim Sinclair) or $3.5 billion (ISDA) in credit default swaps triggered by this latest Greek deal on Friday?

What is going on? Gold down $20 and then up $30 within an hour on Friday.

I watched with interest as the 'alternate' gold media reacted to the latest news from Greece. There had been much made of the fact that if Greece does default there would be armageddon in the markets. An unwinding of biblical proportions. This based on the reasoning that no one really knows how much CDS exposure there is out there. Counter parties do not record these 'over the counter derivatives' on their books. It's kind of a shadowy world that some estimate to be worth around $600 trillion (only Zimbabwe knows what that sort of currency looks like).

Bloomberg states, "Greece's use of collective action clauses forcing investors to take losses under its debt restructuring triggers payouts on $3 billion of default insurance, the International Swaps & Derivatives Association said.

A total 4,323 credit-default swap contracts may now be settled after ISDA's determinations committee ruled the use of CACs is a restructuring credit event, according to a statement distributed today by Business Wire. Before the ruling, Greek swaps rose to a record $7.68 million in advance and $100,000 annually to insure $10 million of debt for five years.

A swaps trigger "raises the question of which country is next and which banks are most exposed," Hank Calenti, a bank analysts at Société Générale SA in London, wrote in a note. "Less than six months ago we had the head of the ECB exhorting that there must be no credit event on Greece," he wrote."

Now, the ISDA said the deal constituted a 'credit event' so didn't use that naughty word 'default'. So is there a technical default? Moodys says this, "According to Moody's definitions, this exchange represents a 'distressed exchange,' and therefore a debt default," the US rating firm said. "This is because (i) the exchange amounts to a diminished financial obligation relative to the original obligation, and (ii) the exchange has the effect of allowing Greece to avoid payment default in the future."

Moody's therefore use 'that' word, default.

What happens now? The markets open after bankers and investors have had nice brunches for Sunday meals and have chewed on the alternatives.  Will the market accept the $3.5 billion figure or start to dramatically unwind its positions and cause huge uncertaintly?

When I wake up of Tuesday, I guess we will know.

Happy sleeping.

Gold in New Zealand dollars: $2093.21 per oz
Previous all-time high: $2311.02 per oz (15 Nov, 2011)

Silver in New Zealand dollars: $41.93 per oz
Previous all-time high: $59.19
per oz (30 Apr, 2011)

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