ECB opens Pandora's Box

ZeroHedge

The ECB, on its own and without judicial or parliamentary review, has swapped their Greek debt for new Greek debt that is not subject to any “collective action clause.” They did this unilaterally and without the consent of any other sovereign debt bond owners of Greek debt.

It seems as though the ECB has basically said that Greece, effectively, can never go bankrupt. They can never be declared "in default" from the looks of what the ECB has done. Basically, it seems that this sets a precedent that the ECB can openly violate the law any time it wants. Now, how good EU bonds are going to look to private investors from now on is another matter entirely.

My guess is about as good as buying skunk flavored jelly doughnuts.

reply to post by AnIntellectualRedneck

They have retroactively changed the indenture, the contract made by Greece with all of the buyers of their bonds, when the debt was issued.

Why? Why would they do this?
Who is supposed to invest in EU bonds, when the indentures can be "retroactively changed" at any time?
I don't see the advantage in this. I'm also tired and I don't want to live on this planet anymore.

reply to post by ColCurious

Why? Why would they do this?

Because if they did not, then the real Pandora's Box would have been opened: A massive, possibly unstoppable, wave of CDS claims would have triggered the Derivatives Markets (in other words, an even more cataclysmic 2008)

However.. now buyers of debt cannot insure their purchases with insurance (CDS).. which in turn will likely have very bad consequences for the Bond markets. Unless buyers bend over and take it.. I know I would certainly stop the purchase of all debts from Euro countries overseen by the ECB.

reply to post by Rockpuck

Thanks and pardon me if I sound dumb... I sure feel dumb, cause I still don't get it.

So the ECB swapped their greek debt for new debt that is no longer tied to a CAC with other bondholders. Why exactly are they getting rid of that? Are they expecting a debt relief or is a greek default finally imminent?
At the same time they basically killed further investments in greek bonds.. so did they just declare Greece toast and told all other bondholders to suck it?

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 button.

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.

reply to post by AnIntellectualRedneck


www.bbc.co.uk...

Is this - the above - somewhat similar to what is now being slowly prepared ???

reply to post by Rockpuck

Thanks again, big star for you now I got it. Much apprechiated.

Hey, I actually just learned something on ATS.

reply to post by steaming


I think that scenario is what they've been trying to avoid, but their actions so far have done little but exacerbated the problem.