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Sunday, March 25, 2012 9:31 PM

CDS Quotes On New Greek Bonds On Hold; Last CDS and 1-Year Bond Quote on March 9

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New Greek bonds are priced at roughly 22 cents on the dollar. Simply put, the market expects yet another credit event. Yet try buying CDS protection on the new Greek bonds. You can't.

The Financial Times reports Greek yields up as CDS trading put on hold

Yields on new Greek bonds have jumped sharply in the past week amid worries over a shutdown of the market in insurance-like products used to hedge the risk of holding Athens’ debt.

Banks have stopped offering prices on Greek sovereign credit default swaps because a payout on new instruments could be forced immediately due to technical problems with the documentation used to settle contracts.

Yields, which have an inverse relationship with prices, have leapt more than 3 percentage points to 16.93 per cent on the new 2042 Greek bond – which is issued under a debt exchange with private sector bondholders and used to set the final payout on CDS contracts – since March 12, its first day of trading.

The market’s concern centres on a so-called 60-day look-back clause in standard CDS contracts, which could be used to activate a payout on new contracts in the wake of a “credit event” that was declared on March 9, when Greece secured private sector participation for its debt restructuring.

Bankers fear the rising yields on Greek debt, and uncertainty surrounding the CDS trigger process, could hit sentiment in other eurozone bond markets, where borrowing costs for indebted governments have fallen from recent peaks.

“This is yet another problem that will deter investors and banks from buying Greek bonds,” said a senior CDS trader at one European bank. “If you can’t use CDS to hedge the risk of buying Greek bonds, then you may decide not to buy Greek bonds.”

Greek CDS prices were last quoted on March 9, when a buyer of protection would have had to pay $7.8m up front to insure $10m of debt against default.

Markit, the data provider, said it needed at least three global banks to give it prices for Greek CDS before it could continue to quote them.
Did you catch that? The last quote was $7.8m up front to insure $10m of debt against default. We are talking about a near certain default on the new bonds.

I just did a check on Bloomberg. The last quote on a 1-year Greek bond shows the yield is 1,143%. The date of the quote is March 9th, the last date CDS was quoted.

But hey, Greece is saved. Doesn't everyone know?

Mike "Mish" Shedlock
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