A default is a default, no matter whether the debtor calls it a partial exchange or something else. The ISDA finally admits as much in the Greek situation. It didn't have much of a choice. If the ISDA had ignored the effect of the debt swap on existing creditors, it would have called into question its reason for being. I've always believed that credit default swaps are meaningless and even dangerous. Banks and hedge funds use them to place directional bets with no regard for a counterparty's solvency. The European versions of AIG, whoever they are, can now breathe easier for a few weeks knowing they can get away with more uncapitalized CDS writing.
The ISDA's decision prevents an immediate seizure of the credit markets that would have made 2008 look tame. The equity markets are closed and have the weekend to mull over this decision. I contended in one of my recent blog posts that Europe's approach to resolving Greece's debt would result in slow-rolling trouble for a select number of hedge funds and banks. Dragging things out this way prevents a cascade of simultaneous defaults provided Greece remains the only trouble spot. The rest of the PIIGS still get a vote, and when they eventually step up to bat the world's central bankers won't be able to raise enough capital to save them all. The final option central banks can employ would thus be hyperinflation.
The ISDA's decision prevents an immediate seizure of the credit markets that would have made 2008 look tame. The equity markets are closed and have the weekend to mull over this decision. I contended in one of my recent blog posts that Europe's approach to resolving Greece's debt would result in slow-rolling trouble for a select number of hedge funds and banks. Dragging things out this way prevents a cascade of simultaneous defaults provided Greece remains the only trouble spot. The rest of the PIIGS still get a vote, and when they eventually step up to bat the world's central bankers won't be able to raise enough capital to save them all. The final option central banks can employ would thus be hyperinflation.
So far, so good. The few hundred central bankers, finance ministers, and their staffs running this show have done a masterful job slowing down this collapse. It remains a collapse, because the Greek state pension funds that were forced to take cramdowns won't be able to meet their payouts for years even if government employees agree to further cuts. That will make for a fun electoral season in Greece, with political beliefs previously thought long gone preparing for resurrection. Remember Communism? How about extreme nationalism? Turn back the clock to the future.
Speaking of turning back the clock, Daylight Savings Time starts tomorrow in the U.S.
Full disclosure: No positions at all in any of this nonsense.
