Hedge fund manager Peter Tchir is advocating to preserve the integrity of the credit default swap at a critical time, as Eurozone economic officials decide what to do about Greece.
He wrote in a note obtained by Bloomberg that if leaders want a “true restructuring of Greece,” CDS owners deserve to be paid.
CDS buyers, like Tchir presumably (it’s not certain if he owns CDS or not from the Bloomberg article about his note), as well as other investors (like Kyle Bass who stands to make $700,000) will be paid out if Greece defaults. If leaders opt to take Greece through a “strategic default” before it defaults however, the general consensus is that it won’t trigger a credit event, and CDS owners will not get paid. (Tchir explains more about the ISDA rules that determine whether a credit event depends on in a blog post which you can read here.)
Nothing is for certain of course. Greece might default on its own, regardless of what leaders have planned for. The anticipation of a non-credit event stems in part from uncertainty about what leaders mean by “strategic default.”
And also, because now the word from the ECB is that they’ve insisted since the start of the crisis that there should be no credit event that triggers swaps.
Unsurprisingly, this “strategic default” would make CDS buyers on Greek debt furious owners of suddenly essentially worthless contracts that had been, for months, so close to getting triggered that they could taste the new car smell.
Tchir is one of them. He wrote in a note obtained by Bloomberg:
“If they are really pushing for a true restructuring where banks and insurance companies are for all intents and purposes forced to accept a big haircut, they should want to trigger a CDS credit event… Lashing out by manipulating markets and rules will do more harm than good…The smart, hedged banks will be the ones punished… The EU wants to punish the hedge funds, but all they will do is punish banks that have been most prudent…. Banks are well prepared for the settlement of CDS… If the regulators and EU are sure the system can handle the bond write-offs, the write-offs for CDS are a rounding error, at best.”
Struggling to appease CDS owners, policy makers are now struggling to persuade investors to accept bigger haircuts (losses) on Greek debt than the 21% already agreed, according to Bloomberg.
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