[Russ Winter]

In November, Gretchen Morgenson (GM) of the WSJ wrote a story describing the “voluntary” debt restructuring process that may give clues as to why the latest Greek “deal” can’t seem to be concluded. Once again, a rumor surfaced Wednesday (apparently out of France) that a deal was “hours away.” Sure enough, back when the Morgenson piece came out, the counterattack to it began and the point she put forth faded. Felix Salmon wrote a rebuttal to her tract with the nifty title “CDS conspircy theory de jour.” I found Salmon’s logic circular and painful to read, but decide for yourself. He even claimed Greek CDS issuance is “minuscule” and writes, “I can’t think of any bank who has ever amassed a big position on Greek CDS,” as if he were privy.



Per Morgenson, it seems Greece hired French banker BNP Paribas to muscle holders. Greek debt holders wonder why they should accept a big haircut and not push their luck instead with the credit default swaps that many (some?) have on hand for this very occasion. The size of the Greek CDS market is quite opaque. If you Google this aspect, the answers run the gambit, but lately there seems to be a “doth protest too loudly” campaign to  minimize it. But after following the financial sector closely in this era,  I have a rule of thumb for all this: Over trading is epidemic, and thus I suspect there is a large, complex market in these Old Maid Cards. I don’t think the banksters that sold this want to pay claims.

The International Swaps and Derivatives Association, the group  that makes the call on whether there is a default and is largely controlled by big banks, says anyone who does not like the offer can walk away, writes Morgenson. “If a payment is missed, trigger the C.D.S. and be made whole,” the group said on its website.  The defining event comes when the debtor misses a payment. However, Ms. Yang, a BNP Paribas representative who is also a director of ISDA and on the panel that makes a default determination (in a egregious conflict of interest), is trying to razzle dazzle and cloud the process by telling the holders about all the slick ways in which the CDS wouldn’t be triggered. There is a question in fact about the “voluntary” agreement in itself. One preposterous claim is that bond issues can be “re-dominated” by fiat and would by some Alice in Wonderland logic, magically avoid a default.

The author  then provides the perfect understated nut to what is about to happen, namely a major blow to the derivatives market. Then the so-called insurance, which is what these swaps are, can be cancelled by fiat, deemed non-valid, and thus becomes a can or worms. There is a lot of Orwellian/Ottoman intrigue going on, and whether you believe the Morgenson story or not, there is a come-to-Jesus moment approaching. Bottom line: Will the Greek CDS swap insurance be paid or not?

“If investors think debt terms can be changed by fiat, they will flee the market,” Morgenson wrote. “Ditto if they find that their insurance can be made worthless.”



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