Sovereign CDS, EFSF, And The IIF - News and Current Events | futures trading

Go Back

> Futures Trading, News, Charts and Platforms > Traders Hideout > News and Current Events

Sovereign CDS, EFSF, And The IIF
Started:November 13th, 2011 (11:00 AM) by Quick Summary Views / Replies:199 / 0
Last Reply:November 13th, 2011 (11:00 AM) Attachments:0

Welcome to

Welcome, Guest!

This forum was established to help traders (especially futures traders) by openly sharing indicators, strategies, methods, trading journals and discussing the psychology of trading.

We are fundamentally different than most other trading forums:
  • We work extremely hard to keep things positive on our forums.
  • We do not tolerate rude behavior, trolling, or vendor advertising in posts.
  • We firmly believe in openness and encourage sharing. The holy grail is within you, it is not something tangible you can download.
  • We expect our members to participate and become a part of the community. Help yourself by helping others.

You'll need to register in order to view the content of the threads and start contributing to our community. It's free and simple, and we will never resell your private information.

-- Big Mike

Thread Tools Search this Thread

Sovereign CDS, EFSF, And The IIF

Old November 13th, 2011, 11:00 AM   #1 (permalink)
Quick Summary
Sovereign CDS, EFSF, And The IIF

We earlier discussed the desperate actions that occurred surrounding the EFSF self-aggrandizement this week and Peter Tchir, of TF Market Advisors, notes that the whole situation was bizarre and is becoming more and more Enronesque every day.

Simply bizarre. I assume by other "EU entities" the EIB bought some? This is really becoming Enronesque. Really is almost mind-boggling that they did this, and as far as I know, if it was a public new issue in the US where a company was buying it on the break (or putting in orders) it would likely be in violation of some SEC law.

The ECB is ultimately going to be the lender of ONLY resort in Europe and it is going to have be with full printing capacity as I'm not sure how much can be sterilized in this environment. This realization that the ECB is going to have to do everything is what is keeping the market up. Unity governments are one thing, and may even be helpful, but the market is looking more and more to the ECB.

But the lack of demand for EFSF debt is simply, as we have repeatedly pointed out, a factor of their own design and a symptom of the actions that a bloated lobbying IIF and the feckless politicians have taken.

Much has been written about the impact of the IIF's "voluntary" haircut program. I maintain that not only isn't it a Credit Event, but it shouldn't be one, because the banks are receiving something in return for doing it (or not having something taken away).

One of the obvious consequences of the EU and IIF decision to pursue this restructuring is the need for banks to manage their balance sheets and exposure "old school". They cannot fully rely on CDS and markets will treat net exposure numbers with skepticism. So banks will sell bonds/loans and unwind their CDS positions and manage their exposure the old fashioned way, by adding or reducing to their bond/loan position.

That impact seemed obvious to everyone other than the EU and IIF. Many expect sovereign CDS to become worthless, and although that was my initial reaction, all that will change is the "basis". CDS will trade tight relative to cash and the basis will be impacted. That has occurred in Greece for example where the basis went from 100 to 93, largely because CDS got tighter and bonds didn't move or went down a bit in price. CDS still has value for several reasons. Hedge funds or other true private holders don't have to agree to the plan, so they can retain bonds and the "basis" package will still function for them. The scale of Greek debt is so big, and the NPV reduction is small enough, that Greece may still have to default in the near term, and banks would be unwilling to take a further reduction "voluntarily". The CDS still has value as no plan is even officially proposed yet, let alone agreed to.

The first real unintended consequence is impacting the EFSF and has nothing to do with sovereign CDS, but everything to do with "voluntary" write-downs. What bank (or IIF member) would buy EFSF bonds knowing that the EU would ask for voluntary restructurings on these bonds ahead of anything else. Since the EFSF is complicated and relies on guarantees, it would be the easiest debt for the EU to restructure if needed. The facade that guarantees aren't debt but are useful is part of the problem. Guarantees aren't as good as a real obligation. If France or Germany runs into any problems and needs to change their debt profile, the EFSF would be the first target. It doesn't really count as their debt, in their minds, so it would have limited impact on market perception (again, in their minds). We have always questioned how likely the EFSF is to honor its obligations if required, but the new question is how quickly would these be restructured.

So the first real unintended consequence of the IIF/EU voluntary plan is to make banks in particular, but all IIF members, scared to own these bonds. They are already long all the sovereign debt they can handle, and not only would this be adding to their exposure (which they would have to account for somehow) it is in an extremely weak form, most at risk of being "voluntarily" forced to restructure. I guess that is the nature of unintended consequences, they have consequences that are unintended.

Hedge funds and real private money won't touch EFSF as a long term holding. It is so complex, constantly devolving, and run by someone without the skills to manage what EFSF has become. Private investors can buy a mix of sovereign bonds to create the risk/return profile they want, and the EFSF just is too confusing, has too much potential future change risk, that it isn't appealing. Sure, from time to time, if it gets cheap to France some funds will buy EFSF, short France or something, but EFSF bonds don't make sense for real private money.

So the pseudo-private money (EU banks, EU pension funds, and EU insurance companies) are reluctant to buy EFSF bonds because they already have too much sovereign exposure, and the EU is likely to force "voluntary" changes on EFSF debt before it would on actual outright sovereign debt. Real private money is confused by the structure, the ever changing purpose, and managements express desire to make non-commercial decisions at off-market prices.

Who does that leave? Only sovereign wealth funds and other supra-national entities. EFSF is the bond only a mother could love. Whatever happens this week, is likely to have consequences down the road, that haven't been thought about and may be worse in the end than letting the system clear itself.

More on ZeroHedge...

Reply to share your thoughts on this current event.


Reply > Futures Trading, News, Charts and Platforms > Traders Hideout > News and Current Events > Sovereign CDS, EFSF, And The IIF

Thread Tools Search this Thread
Search this Thread:

Advanced Search

Upcoming Webinars and Events (4:30PM ET unless noted)

An Afternoon with FIO trader bobwest

Elite only

NinjaTrader 8: Programming Profitable Trading Edges w/Scott Hodson

Elite only

Anthony Drager: Executing on Intermarket Correlations & Order Flow, Part 2

Elite only

Adam Grimes: Five critically important keys to professional trading

Elite only

Machine Learning Concepts w/FIO member NJAMC

Elite only

MarketDelta Cloud Platform: Announcing new mobile features

Dec 1

NinjaTrader 8: Features and Enhancements

Dec 6

Similar Threads
Thread Thread Starter Forum Replies Last Post
BEING A SOVEREIGN, are you a sovereign? Gabriyele Off-Topic 88 April 30th, 2012 12:46 PM
You Canít Spell Tooth Faeries Without EFSF Quick Summary News and Current Events 0 November 5th, 2011 02:30 PM
Euro Zone Strikes Deal on 2nd Greek Package, EFSF Quick Summary News and Current Events 0 October 27th, 2011 01:10 AM
Slovak PM Ties Government's Fate to EFSF Approval Quick Summary News and Current Events 0 October 11th, 2011 06:00 AM
E*Trade baby buys CDS... gain247 Jokes 0 April 15th, 2011 05:36 PM

All times are GMT -4. The time now is 03:21 PM.

Copyright © 2016 by All information is for educational use only and is not investment advice.
There is a substantial risk of loss in trading commodity futures, stocks, options and foreign exchange products. Past performance is not indicative of future results.
no new posts

Page generated 2016-10-25 in 0.06 seconds with 19 queries on phoenix via your IP