Forget Greece, Traders Are Worried About Something That Could Send Us Back To The Middle Ages!!!

Forget Greece, Traders Are Worried About Something That Could Send Us Back To The Middle Ages


In this morning's Cashin's Comments, UBS's Art Cashin addresses what worries traders these days.

A Greek default has been on everyone's minds lately. But the traders Cashin has talked to think that it's just the tip of the iceberg.

The bigger fear is what happens in the credit default swap (CDS) markets. No one knows how big it is, who the counterparties are, and, worst of all, whether the CDS contracts will actually trigger in what many would consider a default.

Here's an excerpt from Cashin's note:

Is There More At Risk Than Greece In A Greek Default - Recently, there has been a buzz building on trading desks and trading floors that there may be a lot more at stake in a potential Greek default than the media has been talking about.

As of now, most of the public discussion has centered on potential contagion among the banks as most of the Greek sovereign debit is held by the European banking community.

Traders, however, fear that the real risk is in the area of credit default swaps (CDS). They are insurance policies, individually written, that basically say - if Greece defaults, we’ll pay you what they should have.

Credit default swaps have grown exponentially over the last decade. Since they are individually written, there is no clear visible record of how many CDS contracts are outstanding. Also unknown is who is involved. The two parties obviously know who the counter-party is but there is no public record that would allow a regulator or a third party to find out who was involved.
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No one knows how much CDS exposure there is on Greek debt but is assumed to be a lot. Banks and others looked at the very high and attractive yields on Greek bonds and began salivating. But, what about that risk - better buy some insurance....




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