Please Explain Credit Default Swap (CDS), Credit Event?

Can someone please explain
a) "CDS",
b) "Credit Event"

Why European Banks are waiting for a "Credit Event"?
And why the current Bailout deal is "voluntary" and why it will not trigger a Credit Event?

From my understanding, European Banks are not accepting the 50 Haircut Deal because, most of the Bonds they hold are hedged by holding credit default swaps. ie, why receive 50% when they can get 100% through CDS? So now, they are waiting for the "Credit Event"..

Isnt a CDS an insurance against a repayement default on a particular bond?So isnt it possible that european banks could be overloaded with these CDSs,therefore wanting somebody to default to cash in?

Something from the Finance Addict website that might interest some!


We know that private holders of greek bonds will be "invited"(seriously this was the word used in the eu summit statement) to take a write-down of 50%-halving the face value of the estimated $224 billion in bonds that they hold.This will help bring the Greek debt-to-GDP ratio down from 186% in 2013 to 120% by 2020.The big question-apart from how many investors they will get to go along with this,given that they coudnt reach their target of 90% investor partisipation when the write-down was only going to be 21% is whether thius will trigger a CDS payout.
That this is even up for discussion is mind-boggling.These credit default swaps are meant to be an insurance policy in case Greece doesnt pay the agreed upon interest and return the full principal within the agreed timeframe.If they dont pay out when bondholders are taking a 50% hit then whats the point?
ISDA The International Swaps and Derivatives Association that wrote the agreement governing most derivative trades,states clearly that a Credit Event would be triggered under the type of haircut proposed...but only if this haircut is forced on all bondholders.And heres where it gets interesting.
Theres no doubt this haircuts being forced.Sure bondholders are only being "invited".But listen to what Jean-Claude Juncker,Luxembourg primeminister and Euro group president,had to say;"It was the fiercely rendered wish by the people,Merkel,Sarkozy,Junker,that if a voluntary agreement with the banks was not possible,we wouldnt resist one second to move towards a scenario of total insolvancy of Greece,which would have cost states a lot of money and which would have ruined the banks."
Sounds pretty coercive no?Yet despite this it still looks like most Greek bondholders will be forced to pay for their own stupidity.Cause as it turns out,over 90% of Greek debt is governed by the terms of Greek law. Which offers much less protection than the UK laws that govern the remaining 10%.
It may seem counterintuitive ,but it would have been totally fine and standard practise to have more of this Greek debt covered by UK law. UK law governs a lot of financial contracts that otherwise would have nothing to do with the UK because its simply seen as a good,solid upstanding legal framework.
Greek law,on the other hand....What follows is a quick comparison.

1. Negative pledge

.English law-Greek bonds restrict Greece from giving more security to new borrowers without offering the same to earlier borrower.
.Greek law-Greek bonds have no such clause.

2. Pari passu

.English law-Greek bonds say that all bondholders will be paid with equal priority in case of insolvency.
.Greek law-Greek bonds have no such clause.

3. Collective Action Clause (CAC)

.English law-Greek bonds can have changes imposed on all bondholders,if a majority agrees.
.Greek law-Greek bonds have no such clause.

4. Cross-default

.English law-Greek bondswill have accelerated repayement if Greece defaults on any bond it has issued,whatsoever.
.Greek law-Greek bonds have no such clause.

As you can see English-law bonds give much more protection to bondholders than Greek-law bonds.Not to mention the simple facts that Greek politicians can always change greek law to get the that they want.But its difference *3,Collective Action,that really explaines why the Greek CDS will likely not be triggered. If Greek law-Greek bonds had a CAC and a majority of bondholders agreed to the 50% write-down then all bondholders would be forced to go along. Thats the type of legalistic coercion required to trigger the CDS,the threats from Merkozy and co dont really count.
Thats not to say this issue is closed.A decision not to pay the CDS out under these circumstances could do serious damage anyway. The ISDA Determinations Committee will have the final word but will only weigh in if a market participant requests a ruling.And i do believe somebody,somewhere is gonna request a ruling. The vote that wins an 80% majority of the Determinations Committees members will carry the day.So whos on the mighty committee that has the power to affect the worth of hundreds of billions of dollars of investement,move global markets and make the leaders of 27 countries tremble like a dried leaf in a hurricane? From ISDAs website.

EMEA

Voting dealers
Bank of America/Merrill Lynch
Barclays
BNP Parabas
Credit Suisse
Deutsche Bank
Goldman Sachs
JPMorgan Chase Bank,N.A.
Morgan Stanley
Sciete Generale
UBS

Consultative Dealers
Citibank
The Royal Bank of Scotland

Voting Non-Dealers
BlackRock (Third Term Non-Dealer)
BlueMountain Capital (Second Term Non-Dealer)
Citadel Investement Group LLC (First Term Non-Dealer)
D.E. Shaw Group (First Term Non-Dealer)
Pacific Investement Management Co,LLC (Second Term Non-Dealer)

You really could not make this stuff up.Ill just leave you with these thoughts from a Reuters story from earlier this year(emphasis mine).

Although there is no formal obligation there are supposed to be chinese walls between people sitting on the DC and traders that know the firms possition on a given name.Ther still is,however concern from some industry members that these Chinese Walls are not always respected in practise.
"Some people are certainly concerned that they are being manipulated by the dealers,"said one derivatives lawyer."On technical points,the DC is fine.The problem is for larger decisions like Greece,where people are clearly going to vote their own self-interest.Its not a a perfect mechanism for big issues that affect a large amount of people to be decided by a small portion of the market."

You already understand them the from what you said below.


where did you get this from?


Depends on whom you ask this question. The people who are gonna suffer from it or people who are gonna benefit from it.

Anyway the only other choice was to have a full default and loose 100%, so they had to settle for whatever that's less than 100%.


cause it's voluntary!!!!!!!



Not all of it is hedged not even half of it, and people agreeing to suffer the 50% cut is the evidence that they are not protected from a full default.

Lets for a moment think that all of Greece's debt is hedged in CDS. Do you really think insurance companies would be able to pay it back in situation of credit event?

It will be a case of digging a hole to throw a pile of mud in it.
.

[quote=nasir.khan;5096734]You already understand them the from what you said below.



where did you get this from?



Depends on whom you ask this question. The people who are gonna suffer from it or people who are gonna benefit from it.

Anyway the only other choice was to have a full default and loose 100%, so they had to settle for whatever that's less than 100%.


cause it's voluntary!!!!!!!




Not all of it is hedged not even half of it, and people agreeing to suffer the 50% cut is the evidence that they are not protected from a full default.

Lets for a moment think that all of Greece's debt is hedged in CDS. Do you really think insurance companies would be able to pay it back in situation of credit event?

It will be a case of digging a hole to throw a pile of mud in it.
.[/quot

nasir

When you say "Not all of its hedged not even half of it" i agree,but how do we know how many of these swaps are out there.The Greek bonds held are estimated to be $224 billion.How much of that has been insured against default?The problem is that nobody knows the true figure,what if the dollar value of these CDS were a lot higher than us governement estimates?