If the banks called the EU-ECB-IMF troika’s bluff, they would potentially face nationalisation. A “credit event” would risk triggering credit default swaps – the scale of losses from which cannot be accurately quantified.
I would have thought that we would know the scale of losses from a credit event.
Say the Greek default leads to a 50% haircut on their €350 billion of debt.
The losses will therefore be €175 billion.
A credit event would mean that all of those various credit default swaps are triggered. And the nominal value of all of those CDS contacts is some huge number. But won\’t they all collapse down to €175 billion?
That is, we know the scale of losses from a default, we just don\’t know where those losses are going to turn up? Because we don\’t quite know how the interlocking CDS contracts will all work out, who will end up holding the baby?
What have I missed here?
Oh, and haven\’t the losses already been paid up anyway? As a CDS position moves into loss (or on the other side, profit) there are daily collateral payments, aren\’t there? So the money that would be moved around by a credit event has already been moved around? What a credit event would do is simply crystallise those movements that have already happaned, turn them from collateral into profit (loss)?
I must have missed something here because everyone seems terribly worried about a credit event but I just can\’t quite see it. There is no AIGFP out there that has been writing CDS without having to post collateral.
Would one of the City readers please correct me?