Kommander wrote: raptor wrote:
phil_in_cs wrote:I'm no expert, but:
1. All private borrowers are now offically in line behind the national banks and bigger/privileged private banks. Those got 100% - everyone else took a hit.
2. CDS are worthless if the parties can finagle a way around getting a CDS event declared when they want to.
I don't know how that will effect the market in the long run. I don't expect the ECB and others do either.
Sovereign credit default swaps have always struck me as an exercise in absurdity.
Can you expand upon this for those who don't know the industry like you do?
I am no expert in CDS. Mainly because I never buy debt that I do not consider credit worthy unless I am playing in the junk bond/troubled bond arena and am buying at a very steep discount.
However my opinion is thus:
CDS contracts are written around defaults. Thus if you wanted to buy a bond from a major worldwide company, say AIG, GE, BAC, etc. You could buy a CDS to "insure" your position against default. This CDS would in theory repay you in the event that there was a default as defined by the terms of the CDS.
The market place where you are likely to buy this CDS is quite likely to include the very large company you are trying to insure. For instance AIG was the party insuring a lot of CDS paper in 2008. Thus if there is major economic shit storm like the fall of 2008 your CDS may be backed by the very entity you are worried about. So while you have "insurance" it may or may not be worth the paper it is written upon since the guarantee is only as good as the guarantors's financial position. That said there can be a case for CDS on private debt and with the above in mind; it still can make sense.
The problem I have with sovereign CDS is quite different and can be seen in the Greek "default/restructure". This particular Greek plan is technically not a default. Thus it is unlikely that the CDS you bought to protect the value of your Greek bond will be required to payoff. Let me repeat that the 53.5% loss you took is not a default under which a CDS is required to pay off. They set up the restructuring purposely to avoid this possibility and said so publicly. Many of the "Private Investors" are funds controlled by the very entities that are parties to the CDS on Greek debt. They thus take a loss on the debt side but they avoid a bigger loss on the CDS side. The investors who are objecting and holding out are most likely the ones who are taking a real haircut.
Where sovereign entities are concerned, all bets are off. They make their own rules. A CDS for sovereign debt is not likely to be useful to an investor in sovereign debt. This is because the CDS issuer is likely at the negotiating table making sure his interests are served. Your interest most likely not be aligned with the key creditors.
BTW the above is my opinion. I am not stating it is an absolute fact.
I would be interested in the opinion of others who do deal in CDS and sovereign debt or anyone with a different view point on the matter (so long as it is an informed viewpoint please).
Edited to add:
A really good site to keep up with CDS pricing.http://workforall.net/CDS-Credit-default-Swaps.html