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Comment by lefstathiou | Hacker News Reader

FYI there is no such thing as a "kind of" or "selective" default. It's binary. You either pay back creditors what they are owed or you dont. It's rare that a company or country defaults on ALL obligations all at once. As a member of Wall Street, I appreciate the WSJ's noble attempt to sugar coat this (article below) but that doesnt change the facts.

Ditto watchandwait below.., glad it finally happened.

http://professional.wsj.com/article/SB1000142405311190355490...

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Wait a gosh-darn-second - if the situation is either definite default OR not-a-default, then Greece has NOT defaulted.

From the article: if you’re a holder of Greek bonds right now, you have three choices... 1. You can do nothing, and hope that Greece pays you in full and on time. (and other stuff)... The first option is by far the most interesting. No one has come out and said that Greece is going to default on bondholders who don’t exchange their bonds;

IE, the aim is to threaten and arm-twisted big banks into exchanging their bonds without any formal default happening. If we're going by a "gold standard", when Greece actually misses a payment on its bonds, then it will have defaulted. Until then, this is negotiation.

Further from the article: "Is it possible for other bondholders — those who haven’t had their arms twisted — to free-ride on the back of this deal and continue to get paid in full? I suspect that it probably is. Which is one reason why this Greek restructuring won’t be the last."

Again, nothing has happen to the non-big-bank holders. Indeed, they get a convenient free-ride.

"the aim is to threaten and arm-twisted big banks into exchanging their bonds"

You're basically saying that Greece renegotiated some of it's debt obligations. Which is a default.

"Sovereign defaults Sovereign borrowers such as nation-states generally are not subject to bankruptcy courts in their own jurisdiction, and thus may be able to default without legal consequences. One example is with North Korea, which in 1987 defaulted on some of its loans. In such cases, the defaulting country and the creditor are more likely to renegotiate the interest rate, length of the loan, or the principal payments."

http://en.wikipedia.org/wiki/Default_(finance)#Sovereign_def...

Maybe it would've been nicer if we just said "deep shit" instead of "default." When you owe the bank a million dollars, the bank owns you, but when you owe the bank a trillion dollars, you own the bank.

Greece knows that there are lots of important people who are overexposed. It knows that if it does the wrong thing, it could trigger a run on its creditors that is akin to what happened to Lehman. It doesn't want to be the bad guy necessarily, who does? But its finances are untenable.

The ratings agencies have said that arm-twisting bondholders to accept new bonds with less favourable conditions amounts to a default.

I promise to pay you $100 tomorrow. I then tell you you'll get your money in 30 years and at a much lower interest rate. That's breaking the original promise, even though I haven't actually 'not paid you back'.

You don't have to except the deal, the only reason to do so is fear that they bail out on you later. So I'd say that if it's binary, this is not a default.

I don't think it's a default in that example until tomorrow comes and I fail to hand over the $100. Until then we're just negotiating and speculating about whether I will or won't hand it over.

i think this is a situation where words are kind of hiding what really matters. what people care about when it comes to 'default' is how this effects the debtors ability to pay in the future and renegotiating debt is a sign that someone may be less able to pay in the future compared to someone that continues to make payments normally.

Then people with an interest in Greece defaulting will buy a small amount of all the short-term debt they can find, and play hardball as it comes due.

The question is whether this is arm-wrestling.

A way to describe what is happens is that the EU says "we know some people are worried about the money Greece owns them. For them, we offer insurance. We have several pricing schemes for that assurance:..."

Phrasing it that way would IMO put some spin on it, but it would not be a bland lie, either.

I think they stroke a good balance here. It is not arm-wrestling, but they likely will reach the intended goals (decrease immediate pressure on Greece, and show the world that the EU will help countries in trouble)

Again, you can call X "effective default" or say X "amounts to default" all you want and I wouldn't argue with your definition. But since the OP called default an absolute binary, then if we want that, we have to wait till we have literal default. IE, what I tell you doesn't matter, we have to wait till it is tomorrow and I haven't paid.

The point is that in an "effective default", there's no violation of any explicit contract however much the loaning parties may have lost confidence. IE, if Greece was home-owner renegotiating its mortgage, there is no point where the bank can go to court and demand the house (though against sovereign nation, banks, of course, have no such recourse but its considered important, I believe).

Sure. I was saying that the important point is that the _ratings agencies_ call it a default. Your and my (and the OP's) definition isn't important. If they think it's a default then for a percentage of the world (who need ratings agencies' support), it's binary-on.

Another agency, the ISDA, says it's _not_ a default for the purposes of a CDS trigger. That, for another percentage of the population, is binary-off. http://blogs.reuters.com/felix-salmon/2011/07/22/the-cds-mar...

The question you have to ask yourself is “What does it mean?” Will readers understand what “Greece Defaults” entails? If not, then it’s the journalists job to write something else.

A semantic argument won’t help you there. If it were my job to write articles about the situation I certainly wouldn’t pick “Greece Defaults” as a headline. I would mention the default in the body and explain what that actually means. Context. Not all defaults are created equal. And that’s actually kinda sorta important.

It just means that instead of having the train quickly derail, they're going to stretch it out like it were a Hollywood movie. Seriously. No one believes that debt is going to be repaid. The politicos are just praying that the train doesn't hit the ground on their watch. If you read the text of this, it just "says" they're going to extend all the terms.

But we all know the truth. Shit is going to happen. If for no reason other than that the Greek government is going to stop working because it can't fund itself.

[Edit: What diff does it make if they're going to practically indefinitely extend the terms? And at those rates? That's like hoping that inflation will make the debt go away. Except Greece is in the Eurozone so that's not quite going to happen.]

Wrong. The way it appears now, the debt is going to be repaid over a longer period of time. Your confusion about this indicates that writers are not doing a good job explaining this to people.

Even if it does get repaid over a longer period, this more or less means those bonds are shot as an investment. Moreover, this means that no one is going to lend the Greek gov't any more money. I didn't see any terms in the agreement where they said they'd be lending the Greeks more money. That means the government is going to stop working. Or Greece will exit the Eurozone. The Greek gov't could of course cut all the way back, but that means a depression, which also means the money won't be paid back.

That remains to be seen; they aren't going to access the global credit market for at least few years anyway because they have too much debt to begin with.

But the existing bonds still have value and they'll still be held as investments. It's not like the whole country has collapsed and the value of its debt is worthless. A haircut is just that, a downward adjustment in the value of the debt.

It's inane to think that Greece will exit the Euro zone because of this. The Euro zone is the only thing keeping them going at this point.

I think that the point that baguasquirrel is making is that if Greece cannot pay their debts now, how confident should anyone be that they'll be able to pay the debts years down the road? It would appear that the larger day of reckoning is being postponed.

Paying me, but not on the originally agreed upon schedule, is still a default. What's wrong about calling it one?

For the same reason that clipping my fingernail isn't the same as severing my finger.

It's not written anywhere that they won't pay upon the agreed schedule.

Debtors have "an option" to gain additional guarantees at an additional cost. For debtors that don't enter into such additional contracts, Greece made all the payments up to date.

You mean they're promising to repay it over a longer period of time, the same way they originally promised to pay it over a shorter period of time. The odds that they'll actually pay the debt over any time frame are very small and everyone knows it.

Negative. Did you somehow miss the 20% haircut?

There is no such proposal to "practically indefinitely extend the terms". Do you actually know anything about this or are you making all this up?

"30 years, and accept a modest coupon of 4.5%", I rest my case. This is comical.

You think that 30 years is "practically indefinitely"? What are you, 12 years old?

Regular readers of Felix Salmon are far more likely to understand what the word "default" means than the general public.

It's an accurate statement, it's not some semantic sideshow.

So you're making a semantic argument, which is, you know, great, but surely there's a difference between the relatively modest haircut that's going on here and the kind of classical default in which little or none of the debt gets repaid?

The author of the piece writes as if Greece is getting off scot-free here. Is not aware of the manner in which mobs have been rioting there for the past month? This is not a pleasant situation for anybody.

As far as I can see in other reporting, it's something of the order of a 20% write down (at least for the German Banks) with the EU buying up some of the bonds and the terms being extended to 15 and 30 years. In other words, it is not clear that how this is a default. In fact The Guardian says:

German government sources said they had received assurances from the international ratings agencies that they would not rush to judgment in declaring a Greek default but would take their time in studying the deal.

http://www.guardian.co.uk/business/2011/jul/22/bailed-out-eu...

Which implies to me that "default" is in the eye of the beholder.

Finance is not my kink, but my understanding is the nature of the "write down" is generally that as a bank you cannot borrow against the money that is owed to you, rather than actually giving up on collecting it entirely.

In other words, the OP headline sees a bit dramatic.

The headline isn't dramatic. Credit rating agencies likely will consider this a default. The article explains it pretty plainly:

But that won't stop the credit rating agencies giving Greece's bonds a default rating — this is a coercive deal, which clearly reduces the value of banks' Greek debt. (After all, just look at those haircuts.)

A default is when you fail to fulfill your obligations. If I owe you $1.00, but instead pay you $0.80 (1 year late)...I didn't fulfill my obligation to you, and it's fair to consider me a credit risk.

Or, put another way, people who declare personal bankruptcy don't do so because they can't pay _any_ of their debt, they do so because they can't pay _all_ of it.

Debt rating describes a borrower's creditworthiness at a particular moment in time. Since Greece won't have access to the world credit markets for some time, their credit rating today is not material. What is at issue here is how quickly their credit rating recovers.

But that's not what's happening at this moment. If you choose to do nothing, you still keep your $1.00 debt. Until now, Greece didn't miss a single payment. It's not making it mandatory to accept the 20% cut. It's not downgrading any promise for holders that choose to do nothing. Nor did it fail to pay its matured debt until now.

It's just offering additional guarantees (which were not present in the initial debt agreement) at a specific cost (a 20% cut or a longer maturity date) for those that want to enter willingly into such transactions.

Right, the headline is a little dramatic.

I think the ECB was extremely careful in the crafting of this deal to do everything possible to NOT trigger a technical default. A default is a delay or missing any coupon (interest) payments or failing to pay back a bond upon it's redemption date.

The reason why it is so important that Greece not default is that a huge amount of hedge funds and other speculative investors have purchased CDS guaranteeing Greek bonds will not default. Because the CDS market is completely unregulated, we don't know how many billions or hundreds of billions in bets have been placed on a Greek default. In fact, even people that don't even own Greek bonds could purchase a CDS guaranteeing a payout if Greece defaults.

In other words, if Greece does legally default by delaying any coupon payments or failing to pay any creditors, the ripples caused by all of the highly leveraged CDS could create another Lehman like scenario where large US and foreign banks don't have the capital reserves to cover all of the bets.

The real crime in all of this is that the CDS market is still completely unregulated and the hedge funds are legally allowed to bet on this. The real world equivalent would be that you're allowed to take out a fire insurance policy on your neighbors house, and then proceed to smoke cigarettes and flick the lit butts at his house, hoping to spark a flame. The hedge funds do this every day by taking out CDS and then proceeding to short Greek bonds. If they can panic enough investors into running for the exits, they can trigger a default and become rich.

An interesting angle along those lines is: given the mostly unregulated nature of the CDS market, do they even all have the same conditions for "default"? Is it possible that some CDS contracts are worded more liberally than others?

Yes, though the ISDA docs have standardized most of it.

But there are also a couple of major types of contract. (a) if there's a Credit Event, the protection seller pays 100 for the distressed debt (essentially taking a loss equal to however much the value of the debt fell). (b) if there's a Credit Event, the protection seller pays EUR40 (fixed payout, with a specific 60% recovery assumption).

By playing on the mix of these CDS, people are probably already be playing on the post default value of Greek Debt, even before anything has formally happened. My guess is that process started over a year ago.

> equivalent would be that you're allowed to take out a fire insurance policy on your neighbors house, and then proceed to smoke cigarettes and flick the lit butts at his house

Yes, hedge funds (and everyone) are allowed to bet on this. If there's an issue here, the question is who is selling fire insurance policies (at non-exorbitant rates) when they know that arsonists are around? If it's European banks that know they'll be bailed out, that's a problem.

In theory, all CDS trades are registered with DTCC since 2009, and my understanding is this works pretty well for contracts as standardized and liquid as Greece. See also the WSJ article linked by ristretto below.

source: http://www.dtcc.com/news/press/releases/2009/cds_contract_va...

data: http://www.dtcc.com/products/derivserv/data_table_i.php?tbid... (see 'Hellenic Republic')

some analysis of data integrity: http://www.bis.org/publ/qtrpdf/r_qt0912y.htm

thanks to: http://www.zerohedge.com/article/debunking-some-myths-about-...)

The important piece of this is that something has had an 'Event of Default' : That will cause all the Credit Default Swaps (CDS) written against Greek debt to trigger.

Banks (mostly European banks, as I understand it) that held Greek debt, but insured it using CDS (written mostly by US banks, ditto), will be able to hand the problem to their counterparties, in exchange for 100%.

There may be some very interesting consequences about to unfold...

However one must note, out of the $400B or so of greek debt, only $4.8B are CDS-insured.

http://online.wsj.com/article/BT-CO-20110708-711764.html

It's important to note, it's not the amount of debt that is CDS-insured but the number of CDS contracts that have been written.

The same 4.8B could have been insured 1000 times.

I would argue that there is such a thing as “kind of” default. Consider a couple of scenarios and think about whether it’s a default in a “common sense” sense, whether a ratings agency would/should consider it a default or selective default, and whether it would/should be treated as a default under CDS contracts:

1) Debtor simply stops paying interest or principal.

2) Debtor makes a voluntary exchange offer, offering new debt that is generally considered to offer _better_ terms (e.g. higher interest rate but longer maturity). 90% of creditors accept.

3) Debtor makes a voluntary exchange offer, offering new debt that is generally considered to offer _worse_ terms (e.g. same interest rate but longer maturity). 80% of creditors accept, perhaps because they think it’s better than an actual default later.

4) The debt contract has a collective action cause saying that if 2/3 of creditors accept, an exchange offer is binding on everyone. 2/3 of creditors accept an exchange offer that offers worse terms.

5) Debtor makes a voluntary exchange offer. The central bank announces that a month after the exchange offer replies are due, it will stop accepting the old debt as collateral for loans by the central bank and will only accept the new debt as collateral.

Would you say that all of these are default and there are no gray areas?

> FYI there is no such thing as a "kind of" or "selective" default.

Yes there is. If this plan goes through, S&P will downgrade Greece's credit rating from CCC to SD ("selective default").

"as a member of Wall Street"

You mean as an employee of a firm on Wall Street?

What happens to you if you're not in that club?

Isn't the whole "default / no default" situation about whether the CDS mechanism will be triggered or not? On the other hand, S&P is the only rating agency with a "selective default" grade. Other rating agencies only have "default".

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