What happens when you get a default that equates to a 50% loss for most investors without triggering default insurance? Massively negative unintended consequences.
Europe has just made a mockery of the sovereign credit default swap (CDS) market by trying to structure a default via voluntary 50% haircuts in order to avoid triggering CDS claims. It makes absolutely no sense to act as if Greece is not defaulting here.
In Greece, I find it odd that private sector creditors are invited to write down notional debt while the European Central Bank and the Troika are not. Clearly, the voluntary and private sector nature of this structure is necessary to at once avoid triggering credit default swaps, to assuage voter anxiety about taxpayer losses outside of Greece, and to protect the ECB from an explicit loss of capital which would render it technically insolvent.
All of these are legitimate aims. But the optics of this are poor and I am not at all convinced participation in the voluntary arrangement will be adequate to cut the debt burden enough to prevent a further ‘haircut’ down the line.
Bottom line: It’s a sham. And it will lead to either much higher bond yields or massive litigation or both. Choose your poison.
Reggie Middleton was on RT discussing this very issue. He has some very astute commentary. Take a look.
Also see: Greece Debt Swaps’ Failure to Trigger Casts Doubt on Market – Bloomberg