Credit Default Swaps Useless as Hedge Against Default

As a result of labeling 50% haircuts "voluntary", Credit Default Swap contracts have proven to be useless when it comes to protecting against sovereign default. The serious implication is investors will need to find another way to hedge.
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More: http://globaleconomicanalysis.blogspot.com/2011/10/credit-default-swaps-useless-as-hedge.html

Hmmm... I wonder what might be a viable alternative...

Not so fast!

... Fitch has come out with ... announcement that a 50% Greek haircut would be an event of default. That said this is not to be confused with an ISDA determinations committee ruling that CDS has been triggered: we now know this will never happen ... Fitch also adds that it is critical that ECB carry on bond purchases, something which neither the ECB nor Germany have agreed to. It also adds that Greek PSI deal is a necessary step, and that the effectiveness of the summit deal depends on details. This is important considering Greece was barely able to get 85% acceptance in its 21% proposed haircut. ...

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http://www.zerohedge.com/news/euro-gyrates-fitch-announcement-greek-50-haircut-be-event-default

Credit Default Swaps might be OK, for a while...

MISH today has an interesting article at his blog re whether or not CDS instruments will be honored in this 50% Greek Haircut.

http://globaleconomicanalysis.blogspot.com/2011/10/fitch-says-50-haircuts-would-constitute.html

He thinks that in the end that they derivative players on the hook for paying off if Greece defaults its 50% WILL PAY. Why? Because if they do not, then all CDS then become worthless, BANG!, just like that. And the Greek portion of the CDS out there is pretty tiny compared to ALL the rest. And that J P Morgan is such a giant in derivatives-land that they will want these CDS to still be worth something, so they may force the CDS to be paid as per their contracts.

MISH goes on to say that even if the CDS ARE paid for Greece, that we are still looking at Portugal next, then maybe Spain, Italy and Ireland (Belgium and France too?). THAT'S when the those dependent of the CDS insurers might not get paid... Then the game is over.

Not a whole hell of a lot of time to get a bit more PMs...

DoChenRollingBearing said:

He thinks that in the end that they derivative players on the hook for paying off if Greece defaults its 50% WILL PAY. Why? Because if they do not, then all CDS then become worthless, BANG!, just like that.

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I think you kind of missed the point about "why" they made it voluntary. If the OTC derivatives pay out, we probably have contagion. They are changing the rules for a reason. To screw the speculators and save these banks.

Agreed. These CDS are probably 20x deep in contracts... They just change the rules as needed to maintain the ponzi!

Btw, did I tell you about the 55 Billion Euro that I found in my sock drawer. Forgot I had set that aside for a rainy day.