Default on Greek Debt?
Fri 09 Mar 12 | 02:49 PM ET
We have breaking news. there is a default on greek debt. headlines right now as we talked about, is the determinations committee the 15 members have decided that indeed there was a credit event with regards to the debt swap and that it is a default. what does this mean? okay. here's what it means. all the swaps that were written, basically the insurance on debt, are likely now going to have to be paid out. what does that mean? there are just under 70 billion in outstanding swaps. that's a big number. but here's the thing. about 66.7 billion of those are hedged out. the last word we had was there was about 3.3 billion in unhedged outstanding notional value swaps. those are going to be paid out. here's the concern that i've got. we're waiting to get michelle caruso-cabrera on the phone in athens. we should probably also talk to a bank analyst at some point soon because there are a lot of banks that have written these insurance swaps. if they've hedged them all out, it's fine. they'll pay out. they'll get paid on the other side. but 3.3 billion not a tiny number. and we're going to have to find out now what banks wrote those swaps because they are likely going to have to pay them out. and if the bank is unhedged or if the numbers don't add up, it could be a big dent to some banks' balance sheets. again, folks, breaking news, international swaps and derivatives association has a 15-member committee. they got together. they decided, yep, it's a credit event. greece has officially defaulted on part of its debt. i tweeted it out i don't know late '09 that this was going to happen. not tooting the own horn, but i think everybody out there knew this was going to happen. michelle caruso-cabrera is on the telephone, i believe, with us from athens. i know a lot of people expected this to happen. some people said it wouldn't, michelle, here we go. we got a greek default. yeah. as expected. and i have to tell you, brian, a lot of people didn't think it would happen back in 2009. remember all the european leaders who said there will be no default in the eurozone? you're absolutely right. the moment has come. it is a exactly right, the time has come, it is a new low point for the european union. this was expected. one thing to keep in mind, the way credit default swaps work, they get paid out over time. so a lot of this may be already in the market. for example, one emerging market credit manager said he bought credit swaps more than a year ago. he's gotten paid 9.5 million euros. he's only waiting for another half a million euros to come through on this particular deal. the rush to have to pay credit default swaps that we saw in the week of lehman brothers, and the concerns about aig, those were so rapid. this time we've had roughly two years for the credit default swap to start slowly paying out over time. so that may be why we see less of a ripple effect this time around, even though it's a big event. it is a big event. i think we should update the markets. we're not expecting to see the dow tank on this news, because as you've said, as we've said, as everybody's said, most of this stuff is hedged out. i think, michelle, the issue now is going to be, what banks wrote what swaps. if you read boomerang by michael lewis, he talks about the swaps out there. some of these were purchased from morgan stanley at $1,100 a contract that will pay out $700,000 per contract. not sure if those contracts are still outstanding. we're going to find out which banks are going to start paying up. yeah. but remember, morgan stanley on that particular contract has probably paid a lot of that $700,000 already. and you're right, there's a carrying cost for these swaps. they're getting collateral on the back end. good point. it's not a pure payout because they're getting paid collateral every month on these contracts. absolutely. or think of it, or think of it, it's -- not to get too wonky, but it's something called reverse margin. in the old days before the collapse of lehman brothers, if you had a profit on these contracts, you were willing to keep them as a paper profit. because you weren't worried about the bank that wrote them collapsing. after lehman brothers collapsed, a lot of people saw their money caught up in the profits they thought they had, that were sucked in a bankruptcy proceeding. behavior changed across wall street. every time there was money to extract, they didn't keep it as a paper profit, they actually took the physical money out. so that money has been distributed over time. because nobody wanted to be caught without having gotten their money already. probably of it already has been paid out. that's a great point. not a pure payout. but i think, too, michelle, and again, let's talk about this a little bit without getting into the numbers and cat claws and all the other stuff, which is really this. this is a sovereign default. that, to me, is the headline. greece has defaulted a number of times over the last century. a number of countries have defaulted, argentina, a number of times, russia, indonesia has defaulted. but this is a eurozone nation that has by the one committee that determines itself defaulted. that is a huge headline. even if it doesn't necessarily trigger massive financial problems, it is a headline. it is a theme. absolutely. it is the first advanced economy in more than 60 years to default. and it is not because of war. and frankly, no matter what this is, brian, you and i know that if you only get paid 47 1/2 cents when you're owed 100, it's a default. but restructuring by any other name hurts as badly for everyone involved, whether it's the greek government, the european union, the banks, the pension funds, the people on the ground. michelle caruso-cabrera, fantastic reporting. at this stage, the nasdaq, s&p and the dow, just taking a look at the numbers here, have not moved particularly on this news. i think it's more of the theme, as we just said. it's the idea, as michelle says. we'll take a break and come back and talk more about this. the debt, greece has officially defaulted on its sovereign debt.