Somewhere in the Argentine (CDS) Andean foothills…

Posted by Joseph Cotterill on Jun 17 17:27. 3 comments | Share

Greece one-year credit spreads in June 2011, meet Argentine one-year credit spreads in July 2001 (chart from an old IMF paper):

You have a lot in common — around 2,500bps actually:

That’s a chart of Greece’s CDS curve at Thursday’s close, More…

Greece one-year credit spreads in June 2011, meet Argentine one-year credit spreads in July 2001 (chart from an old IMF paper):

You have a lot in common — around 2,500bps actually:

That’s a chart of Greece’s CDS curve at Thursday’s close, courtesy of Markit’s Gavan Nolan.

What’s really fascinating? Nolan says that composite recoveries attached to Greece CDS quotes remain at around 40 per cent. That’s no more severe than a few months ago despite the movement in spreads since then. It’s fascinating because if you were in the market to take out a recovery lock on a Greece CDS contract, the time is now. You wouldn’t necessarily settle for a 40 cents in the euro recovery as your reference point either, now that various tail risk scenarios are coming true. (Sadly it’s difficult to track recovery lock prices.) Update — wait! Markit analyst Lisa Pollack says that recovery locks are being quoted at 37 per cent down from 42 per cent last month.

But anyway, if you consider Felix Salmon’s argument that no one ever will price in a Greek default, then it’s clearly noteworthy that ‘the market’ was futilely pricing in an Argentine default all the way up to 10,000bps in late 2001. (The government was eventually to announce a debt moratorium in the last days of December. It managed to buy a few months with more loans, pliant official creditors, and shuffling a few ministers, even as ordinary Argentines seethed. Sound familiar?)

Except — are spreads really going to be what matters from this point on? Is it always about pricing just the chance of default?

Versus recoveries and deliveries of bonds by CDS buyers to sellers within the contracts, say.

It’s been such a long time since the event so details are sketchy, but there has been talk recently about how deliveries worked in the Argentine debt crisis. It’s based on the idea that banks had legacy positions but (for whatever reason) not enough bonds to deliver into them, thus they basically engaged in a massive game of pass-the-parcel. Trigger, deliver, pass bonds on. Trigger, deliver, etc.

At the complete other end of the credit market, in 2009, there was a very odd mess in the Kazakh lender Bank Turanalem’s restructuring, where there was a confusion about deliverables. The game there was to concentrate risk into the hands of those engaging in the broader restructuring of the bank’s debt, we’ve heard.

Now, quite a few Greek CDS contracts are in tenors of around five years and therefore could well be legacy positions pinging about. There’s a really sharp debate about triggers and it’s not wholly clear who could deliver (or, in what shape, if shorter-dated maturities suddenly become scarce through various reprofilings or rollovers or whatever).

Deja vu all over again?

Related link:
BarCap’s Hellenic tale of CDS risk – FT Alphaville

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