Beyond Greece: More Questions Than Answers Over Future of CDS Markets

Whether or not the Greek debt deal is finally (finally, finally) reached, the next big question outside if Greece will default again is what exactly the implications are for the Credit Default Swap market.  The CDS market is relying on the decision from the International Swaps and Derivatives Association, and that depends upon whether or not the debt swap was determined to be voluntary or forced.  Let’s see…  How many financiers who invested in debt ultimately took the stance that it is ok to settle for a fraction of the face value of a sovereign bond?

One may wonder whether or not the CDS market can survive if the ruling is that the deal was voluntary.  Supposedly a 90% vote “for” by bondholders makes this a voluntary decision. More importantly, what about the “new bonds” after the old bonds have been swapped?  Ultimately there will be a CDS spread on those as well, if there is a CDS market that is real.

If the ISDA decides that no credit default swap is to be triggered, then what will it mean when (or IF in the polite form) when the same form of roulette starts to be applied to Spain and Portugal… and even Ireland and Italy?  If the terms will just get reshuffled into oblivion to where the CDSs are not triggered, is it no different from kids yelling “Do Over!” in a game?

It turns out that we are not alone in our questioning the next round of CDS spreads…. FXStreet.com’ Adam Button asked, “I bet someone is making a market for post-PSI Greek debt already.  I will be keeping an eye out for a quote because I would love to know what probability the market is giving for another default. Any guesses?”

Maybe it is insensitive to ask these questions considering that the decision is due any moment, but restructuring the terms on all bondholders is actually a default according to most investors.  What will the value be in the future for the CDS market if rules can be retroacted that nullify your insurance and options bets on the assets you hold?

It is interesting to ponder what the CDS spread will be on the new bonds for Greece.  After all, Greece does hold elections and it has to be a safe gentleman’s bet that future politicians in Greece will run on the grounds of undoing the promised austerity measures and some even to exit the Euro entirely.

The biggest thing to ponder is what exactly this whole process means for the CDS markets.  Maybe this is food for thought in 2013 and beyond…

JON C. OGG