innocuous statement issued by the International Swaps & Derivatives Association (ISDA) on Friday, which reads: Get my next ALERT 100% FREE
The Determinations Committee determined that the invoking of the collective action clauses by Greece to force all holders to accept the exchange offer for existing Greek debt constituted a credit event under the 2003 ISDA Credit Derivatives Definitions.
According to the Depository Trust & Clearing Corporation’s CDS data warehouse, the total net exposure of market participants who have sold CDS credit protection on Greek sovereign debt is approximately $3.2bn as of March 2, 2012.
The net cash payout on CDS when a credit event occurs is the face amount of the CDS contract less the recovery value of the underlying obligations as determined at a CDS auction. For example, if the CDS auction showed the recovery value of debt to be (hypothetically) 25%, the aggregate amount payable would, in Greece’s case, be 75% of $3.2bn: $2.4bn.
Furthermore, statistics indicate that, on average, 70% of derivatives exposure is collateralized and the level of CDS collateralization is likely to be even higher as over 90% of CDS transactions (by numbers of trades) are collateralized. [emphasis added]
In essence, the ISDA said Greece cheated in an attempt to forestall a default on $3.2 billion of its debt. The nation has defaulted, and now the credit default contracts issued against the debt must pay off.
However, there’s some curious verbiage of the ISDA statement that sticks out like a sore thumb. Why would the ISDA gratuitously include the emphasized text (above) within its official statement?
The details added to the decision to declare a credit event is akin to a judge handing down a ruling, then embarking upon an explanation into the details and ramifications of the ruling, of which he cannot possibly know in advance.
Just as Fed Chairman Ben Bernanke stated confidently in early 2008 that the sub-prime mortgage crisis was “contained,” the ISDA somehow knows that the trillions of dollars in CDS’s attached to the Greek debt in question, which are not registered with its data source, DTCC, have no bearing to the total exposure of the banks and other institutions to the writedown.
In fact, we now know, what was labeled by Bernanke as a sub-prime mortgage crisis turned out to be instead the start of a full-blown real estate crash. ALL mortgages became sub-prime and the cascading bankruptcies and bailouts ensued.
And that’s exactly what we have here, a Lehman II, according to “Mr. Gold” James Sinclair—who, incidentally, was one of a handful who said from the beginning of the ‘sub-prime’ defaults that Bernanke was downplaying a much larger problem.
“The release made by the International Swaps & Derivatives Association (ISDA), for the average Mensa member or genius, is totally incomprehensible,” Sinclair told King World News. “The press is using the word default, but the ISDA is using the word ‘auction.’ Clearly, the amount of CDS’s outstanding is infinitely more than the $3.5 billion that is being quoted.”
Sinclair added, ““The BIS confirms, in the area of CDS’s the total outstanding is approximately $37 trillion. So I believe the reports being given about this just being a small and modest market event is false. As a market observer and having more than 50 years in the business, the real number is at least 50% or more of the existing $37 trillion that is related to Greece.”
Of the $37 trillion reported by the Bank of International Settlements (BIS), CDS’s written on Greek debt must total into the trillions of dollars, according to Sinclair, who had also said on several occasions that the Lehman meltdown is a mere a warmup to the main event—a conclusion also drawn by George Soros and many others outside the officialdom and Wall Street complicities.
And Swiss money manager Egon von Greyerz of Matterhorn Asset Management agrees, but takes Sinclair one step further. With the other PIIGS countries mired in a similar debt default spiral, Greece serves as a template for the other beleaguered nations, not the exception. The market will discount equivalent debt owed by Ireland (NYSEArca:EIRL), Portugal, Spain (NYSEArca:EWP) and Italy (NYSEArca:EWI) at some point during the crisis, von Greyerz reckons.
“It’s not just the $200 billion, we are talking about consequences for the other countries in southern Europe, Italy, Spain and Portugal,” von Greyerz told Eric King of KWN. “So, if the Greek deal collapses, the ECB will have to come up with a package of over $1 trillion euros just to ring fence the rest of Europe.
“Then, on top of that you would have all of the CDS’s and that’s another few trillion euros because then it would be a proper default.”
von Greyerz continued, intimating that the next QE will most likely total into the the multiple of trillions of dollars, not the more modest hundreds of billion of dollars injected into the banking system in previous central bank operations (not including the Fed’s covert currency swaps window scheme) between the Fed and ECB.
“Of course, the U.S. would also be involved through a lot of the CDS’s and there will be a few trillion dollars the U.S. will need to come in and support,” von Greyerz said. “So, whether the money printing starts this week or whether it starts in a few weeks time, it will start.”
Echoing Sinclair’s long-time assertion that central banks will undertake “QE to infinity” as a significant portion of approximately $700 trillion of tier-three assets (BIS statistics) default in a similar manner to Greece, von Greyerz stated, “Hyperinflation is very likely to happen. . . I’m absolutely convinced we will be right. The world is not expecting this.”
Related: Vanguard European ETF (NYSEArca:VGK), ProShares UltraShort Euro ETF (NYSEArcA:EUO), CurrencyShares Euro Trust (NYSEArca:FXE).
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