SODOM & GOMORRAH: It’s happened – despite all the hand-wringing, apologizing, and bailing out, the Greece default has happened.
Late Friday, a group of dealers in credit default swaps decided that Greece’s recent bond swap constituted a “credit event”. The yes vote by the International Swaps and Derivatives Association entitles holders of Greek credit default swaps to approximately $3.2 billion. A credit default swap is an insurance policy that can be taken out if a bond issuer defaults.
The Greece default was preceded by a bond swap deal that forced bond holders to take significant losses on the return of their money. The swap, approved by roughly 84% of bond holders, triggered the Collective Action Clause which forced the ISDA to decide that Greece has created a “credit event.” The ISDA defines three types of events: bankruptcy, failure to pay, and a restructuring according to Gavan Nolan a credit analyst at Markit. The Greek restructuring is tantamount to a default since the Greek government has basically acknowledged that it can’t pay bond holders the money they’re entitled to.
Nolan downplayed the event, saying that $3.2 billion was much smaller than expected and that the event is likely to be over-exaggerated.
We have yet to witness a wide-scale default such as this. Far from being exaggerated, the Greece default and the triggering of credit default swaps signifies the beginning of the end for Greece, the Euro, and any myth of stability we’ve seen thus far in the international financial markets. We’re all about to be screwed.