What Are Repercussions If CDS Hedging Fails?

The EU arranged Greek bailout proceeds apace, as everyone else awaits for the official default date (Greece has already defaulted in my book, but I am in the minority). Hedged sovereign debt investors must feel like they are waiting for their wealthy grandfather to die so they can get to the reading of the will.

I have no dog in this fight, other than than an interest in seeing derivatives, especially Credit Default Swaps, appropriately regulated as insurance products.

But the process for determining a payout for CDS is fascinating. The people officially determining defaults are not objective Judges or impartial observers; rather, a group of self-appointed traders, conflicted, biased, non transparent participants — with positions affected by their own decision —  determine what a Greek default is and isn’t.

Who is on the ISDA committee?

Bank of America Merrill Lynch
Credit Suisse
Deutsche Bank AG
Goldman Sachs
JPMorgan Chase Bank, N.A.
Morgan Stanley
BNP Paribas
Societe Generale
Citadel Investment Group LLC
D.E. Shaw Group
BlueMountain Capital
Elliott Management Corporation

Again, I wonder loud: Why would one want to own something that has a payout determination made by this group of fucktards objective, ethical, unbiased committee members?

All of which raises a few issues in my mind: I do not know the answers to these questions, but they sure are intriguing:

1) Why would anyone ever buy a CDS? Do they have true intrinsic value, will they pay off like a futures contract or option? Or, must you pursue their payout via some combination of lobbying, litigation and persuasion?

2) If the answer to the prior question is “No to CDS,” then does this mean that sovereign debt cannot be hedged?

3) If that is the case, why would anyone buy any sovereign debt other than the very strongest nations? Outside of the US, China, Germany, and perhaps Switzerland, why would anyone purchase any other Sovereign debt? What do questions about hedging mean for debt issuance?

4) Which raises yet another question: If middling sovereign debt is downgraded by buyers, will these countries be forced to break out the printing presses? Might that add further pressure for the softening of the EU zone? the weaker countries be forced out of the EU zone?

5) Are we then going to see Drachmas, Lire and other forgotten currencies?

6) What does this mean for hyperinflation?

7) Lastly, what sort of a frenzy will the Gold Bugs be whipped up into?  Will they simply turn their enthusiasm into a yellow metal jihad? Are we going to see adverts in the WSJ and FT urging us to Buy Motherfucking Gold?

I do not know the answers to there queries, but they sure are fun to think about . . .

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