As the news surrounding the Grecian Debt Formula of Doom continues to go from bad to worse the markets have entered a ‘see-no-evil, hear-no-evil’ phase of denial. That’s the best way I can explain it.
The situation has deteriorated to the point where even if the existing creditors are paid off with the new “Fresh Start” bonds, the buyers would be doing so at an 80% downside to par. From Zerohedge.com:
So let’s say it deserves a comparable yield to its current 30 year bonds, which are priced to yield about 23%. We are being a little generous and estimate the fresh start bonds will yield 20% post break. Which means that according to a generic bond yield calc, the price on the fresh start bonds post reorg will be… 17.9 cents of par, or immediate losses of over 80% the second these bonds break for trading from par.
In all of this an 80% haircut by accepting new worthless paper in place of the old worthless paper ISDA will refuse to consider this a ‘Default Event,” therefore nullifying all CDS’s written against this Greek tragedy. If that’s the case then doesn’t ‘Total Exposure” then equal “Net Exposure?”
In the face of this bank stocks are rallying, which can only mean that the bailouts are happening in spite of all of the talk to the contrary.
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