The Greek PSI deal is done, deadline passed, the ISDA has called a credit event on bonds that did not voluntary sign up for a 70% plus haircut. However what all the folks in Wall street are doing this weekend are trying to work out how long the queue is outside the door of the ISDA (the folks who trigger CDS deals) Monday morning coming, to see what debts will be forced to be reported on profit and loss statements. After the forced accounting standards change back in 2009,a loan need not be written down to its true value until it has been proven [via default] to be worthless. This means bailouts of banks and countries allowed loans to maintain full value on banks balance sheets. The Greek default and soon to follow cascade of loan defaults and more ISDA meetings triggering CDS means that more losses will be printed on Profit and loss statements in the near future. How large this is, will determine what happens to the market starting Monday. Mark J Grant makes this point in The Eight Hundred Pound Greek Gorilla Enters The Room Extract.. I expect the ratings agencies to place Greece in “Default” and with their banks following. The markets are “Ho-Humming” and the conversations revolves around “Net” CDS exposure and the write-downs that have already taken place at the European banks. Please recall AIG and what happened with Lehman and what do we find this morning; KA Finanz, the Austrian bad bank, faces $1.32 billion in losses due to their exposure to the Greek CDS contracts according to a Bloomberg article. So now we will wait and see who else is on the hook, who may be seriously impaired, because the Gross number of about $79 billion for Greek CDS is about to enter center stage. I hold up my hand, “One moment please” as I introduce you to the 800 pound Greek Gorilla that is about to enter the room. Allow me to now present to you the “OTHER” Greek debt that is outstanding and will have to be accounted for as the country defaults. Detailed below are some of the “OTHER” sovereign obligations of the Greek government which have now been submitted to the ISDA and I list some of them below. You will note that there are bank bonds, Hellenic Railway bonds, Urban Transportation bonds et al that are guaranteed by Greece. (RTT Etc etc the list grows) COMMENTS: You can bet that the long list of loans soon to be classified as in default has not been priced into the market. Remember these loans can not be swapped with free cash from the ECB LTRO, so they are not going away. The Gorilla is in the room, and he is waking up. Gorilla is a term to use when you are bearish and the markets become violent to the downside, after all Gorilla can cause considerable damage is a small room. We are in a volatility lull, and the cycle is strong within the VIX/VOX and until proven otherwise we can expect more rock and roll into the US summer months. CBOE Implied Volatility (VOX) Chart with a powerful cycle that still working.. You know when the White Knight (anti fraud, money printing) is winning when the US Dollar is bullish, and this is so. Best way to profit is long volatility.
updated Mar 10, 2012
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