Will Greece Trigger Credit Default Swaps?

LONDON, February 28, 2012 – The International Swaps and Derivatives Association, Inc. (ISDA), as secretary to the Determinations Committees (the DCs), today announced that a question relating to a potential credit event with respect to the Hellenic Republic has been submitted to, and subsequently accepted for consideration by, the EMEA Determinations Committee.

In accordance with the Determinations Committee Rules, a meeting will be held at 11AM GMT on Thursday, March 1 to determine whether a credit event has occurred.

Further information regarding the question is available at www.isda.org/credit.

The ISDA's decision over the next 30 days on whether or not Greece's debt write down will trigger a "credit event" that will trigger Credit Default Swaps (CDS) is the most important policy decision for the global financial markets since March of 2009, when the US removed the mark to market accounting for our banking system (we now run under a mark to myth system that is still is place). This accounting change allowed banks to mark their toxic assets at full value and (combined with QE1) put a bottom in the S&P 500 at 666.  The market has since (with the help of QE2) gone on to double in just under three years.

If the ISDA determines that the Greek bailout is a "credit event", that means insurance contracts (Credit Default Swaps known as CDS) will be triggered.  This will set the precedent used for the coming bailouts of Portugal, Italy, and Spain.  This is far more important than the actual Greece CDS contracts which are minimal in size.

If the ISDA determines the bailout does not constitute a "credit event", it means the insurance contracts will not be triggered and will not be forced to pay out.  The much used analogy on this site is to think of it as your home or car getting destroyed and your insurance not making the payment for the damages.

For a more complete discussion on Credit Default Swaps, you can review my post from last Tuesday titled The Greece Bailout: Do Not Trigger The Bomb.

Tomorrow (Wednesday) we will have the details of the LTRO program from the European Central Bank.  I will discuss the results of the program and its implications for the markets this week (for a sneak preview, look at a two month chart of silver).  For a review on what the LTRO program is and estimates on its size, see Behind The Curtain: The European Bank Bailout.