Sunday, March 4, 2012

The market is already quoting CDS on the new Greek bonds

The Greek credit event is now fully priced in. The 5yr CDS is trading at 75/78 points upfront with the cheapest to deliver bonds trading in the low 20s. The points upfront pricing for the one-year CDS is almost the same as that for the 5-year contract - typical pricing for a defaulted credit (CDS of all maturities will settle the same way). The CACs will be enforced this Thursday and the ISDA committee will rule this to be a credit event.
The Telegraph: Authorities in Athens are ready to enforce the controversial collective action clauses, or CACs, to impose the restructuring deal on all bondholders as the number of voluntary agreements look set to fall short of the required amount.
What's next? Well, some technical issues around the auction are yet to be worked out. There is also the issue of funding Greek banks which will no longer qualify for standard ECB funding.
The Telegraph: "Greek banks will probably be barred from normal ECB funding and have to turn to the Emergency Liquidity Assistance [provided by the ECB] instead but for how long, we don’t know.”
And then... the sun will rise and the world will go on as usual. The dealers are already quoting CDS on the new PSI exchange Greek bonds. These are quoted at around 20 points upfront and the bets are on for the next Greek credit event. But the markets are starting to shift focus away from Greece and onto Portugal, with volumes for Portuguese sovereign CDS picking up and spreads continuing to stay wide.

Portugal 5yr CDS spread assuming 40% recovery
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