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It is credit event bigger than the collapse of Lehman Brothers that ushered in the 2008-9 recession. Stock markets sold off sharply yesterday but have barely digested this news.
Default
At a meeting in Frankfurt yesterday the Greek Debt Management Agency 'confirmed' that, if a majority of bondholders agree to the deal, it 'intends... to declare the proposed amendments effective and binding on all holders'. That is a clear default.
Traders seem to have barely understood what this means. After all most people are bored stiff by the Greek crisis and thought it had been solved with the ECB bank loans and stability pact. Official estimates put contingent liabilities at $1.3 trillion.
Now as ArabianMoney has been warning for sometime it is evident that this has been a deception. What has actually happened is that the mechanisms to handle a default have been put in place.
As one attendee at the Hedge Funds World conference in Dubai this week put it: the patient is not being taken to the butcher's shop but properly prepared for surgery and aftercare.
Basket case
We wish Greece a swift recovery. The trouble is that the country has a nasty case of debtosis that has also affected many other nations. This is therefore the first case of many that needs treating.
Actually the analogy is not a very good one as the death of one patient in a hospital does not usually trigger a viral reaction in the rest of the population. This is what default means, and who gets it and how bad the disease proves to be is unknown.
These are dangerous times indeed and those pulling money out of financial markets have the right idea! There is going to be a lot of blood on the streets over the next few weeks.
That is left to a peculiar little agency formed for this purpose.
It is called the "International Swaps and Derivatives Association."
The 6 Credit Events under ISDA Definitions are:
1. Bankruptcy
2. Obligation Acceleration
3. Obligation Default
4. Failure to Pay
5. Repudiation/Moratorium
6. Restructuring
[Link]
Technically, if this event is not defined as a "default," then the "credit default swaps" will not have to be paid.
So, we will see how this goes.
But the end game is clear.
The bond holders apparently have so much money that not only can they afford to invest in shaky sovereign debt, but in protection-type securities to hedge against defaults on that debt.
Obviously, their game is not to increase principal (which is probably acquired by devious means in many cases anyway) but to increase cash flow. I think the negotiators are hoping that the cash flow from this deal will make up for the principal loss in the minds of the majority of bond holders.
However, things are getting to the point where the cash flow cannot be assured, either.
So, the people who made these unwise investments are going to have to take a big hit. And this will, more and more, be the pattern as the dishonesty behind so many of these securities becomes more apparent.
You can't survive on a safe full of money if there is no corn to buy, no animals to slaughter for meat, no wood to build houses and no energy to fire bricks.
Those who have remained closest to the basic truths of life will be the least affected by these upheavals. That does not include most Americans or most Europeans.
I am very curious to see how much longer the lies can be sustained. They are toppling down on us as I write this.