Athens issues threat to bond holdouts Financial Times. Hahaha. The threat to default is like threatening to throw Br’er Rabbit in the briar patch. What did anyone with an operating brain cell think would happen when ISDA deemed the restructuring not to be a credit event for creditdefault swaps? So anyone with a CDS against a Greek bond has every reason not to participate. The assumption is no way can ISDA deem a bona fide default or involuntary restructuring not to to be a default, it would completely discredit CDS as a product (Felix works through some scenarios where that might happen, although I don’t see his core assumption, that the new bonds trade at par, although I could see a call option being introduced). This is gonna be fun. The powers that be knew damned well that CDS are a huge source of interconnectedness and systemic fragility (they are underpriced insurance, which means that any player that writes a lot is likely to eventually go boom). They chose to do absolutely nothing about it. Now they are going to see how bright it was to accede to the demands of fee addicts. Either having meaningful CDS payouts on Greek bonds or having none, which discredits CDS, will have unexpected but likely significant outcomes, so pick your poison.
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