muses of the moment

June 11, 2012

ISDA speaks on Spain

More important than a bailout in Spain (or any other EU country) is the ISDA ruling on if this “bailout” triggers a “credit event” and CDS will be paid out. They are saying no, it doesn’t. So everyone is selling, since their hedges are now non-existent. This is the same ruling they had on Greece, so it is no surprise. GG suspects that the new ISDA rules will be that nothing is ever a credit event.

Click here. This is very important to understand.

There will never be a default event, so your hedge against a default is a waste of money. Therefore, if there is a rumor of non-default default, the ONLY investment protection is to SELL the position.

Do you see how JPM’s $3 billion lost “hedge” position might have been a CDS for say, a Greek default, but the ISDA called it a non-credit event, so they lost their shirts? This is just one of many possibilities, we do not know exactly what the JPM loss was. What do they care, they have access to the no-interest, unlimited Fed funds window? But…MF Global, different outcome.

This is a nasty little feedback loop that we will continue to see until all countries have “not-defaulted” on their debt. Print money, never have a formal default, investors sell bond positions as only option,  bond markets crash, no sovereign credit available at any price (since there is no hedge against a default), print more money for bailouts, and so on…….debt deleveraging happens anyway.

Update: Reggie Middleton claims in past posts that finance, insurance and (commercial, in particular) real estate industries will/are getting hit from this EU domino of sovereign non-default events. Click here.


1 Comment »

  1. thanks for your important points.they are always of value

    Comment by avshalom — June 12, 2012 @ 9:13 am

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