posted on Feb, 19 2012 @ 10:49 PM
reply to post by ColCurious
It really is quite complicated.. a (somewhat?) good read on the topic: www.zerohedge.com...
To simplify the matter I'd explain it this way: Greece has a huge amount of debt that has extraordinarily high interest rates. This increases the
total debt obligations because it takes into account total principle balance and total interest balance. In order to restructure the Greek finances,
they determined the best way would be to take high interest Greek debt, and re-organize to long term low interest debt. For instance a 1 year bond at
30% would become a 30 year bond at 5%. HUGE reduction for investors.. you're talking the loss of billions. It is effectively a bond market reset
The Greek CAC on their debts (the collective action clauses) would be circumvented under only one condition: The debt restructuring HAS to be
voluntary. Or at least the majority of private holders must agree.
IF they agree, bend over and let the ECB have their way with them, they lose billions in investments, get stuck with a stack full of garbage low
interest 30 year bonds that they won't have a chance in hell of selling (because naturally Greek debt interest rates will explode.. again.. leaving
30yr 5% bonds as toilet paper)
OR ... they can say !@$! you ECB and take the CAC which would in turn trigger a CDS (Credit Default Swap) payment on the bonds. Greece still
restructures the debts, but the insurance companies and banks that sold huge sums of CDS's on Greek debt end up paying billions .. likely causing
credit markets to seize, trigger corporate bond defaults, and a cascade avalanche of CDS claims across the entire market. Which is huge.
Astronomically huge. So when ever you deal with a CDS derivative claim on such a massive scale as a country going bankrupt.. you run the risk of the
event being cataclysmic. Lehman Brothers for instance was cataclysmic. AIG was entirely a derivative CDS calamity.
You'll hear it referred to in two ways on MSM .. "Messy default" and "Orderly default"
If investors accept the terms Greece "orderly defaults" .. and all is good unless you invested in Greek debt.
If they do not accept and take the CAC way out to ensure payment on their behalf.. it's quite likely the entire European economy, then the entire
World economy, could collapse.
Or it might not. No one actually knows the extend of the derivatives market and just how interconnected it is.