Sunday, March 11, 2012

We May Not Realise It Yet But We Are In A Bullish Phase

As usual, the barrage of information overload when watching CNBC or Bloomberg TV will overwhelm everybody. Try to watch as little business TV as possible. I digress, there was an important bit of news that will affect all equity markets.
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The Greece's debt resolution (somewhat). More importantly, the activation of the credit default swaps tied to Greece's bonds.

Greece’s debt restructuring will prompt payouts on credit-default swaps tied to the country’s government bonds.

The decision by the International Swaps and Derivatives Association ends months of speculation that a Greek default might not set off the swaps, a result that could have undermined their role as insurance against debt defaults

Still, doubts about the instruments’ effectiveness may linger. European officials initially shaped the Greek debt restructuring to avoid activating them. The concern is that future restructurings could be arranged to stop swaps from paying out.
Bianca Bai
The Greek government chose to apply so-called collective action clauses, which it had earlier inserted into its bonds registered under Greek law. The deal maximized total debt relief for the country, but it also forced losses on bondholders — a credit event, and therefore a trigger, for the swaps.

The decision to invoke the clauses showed that European policy makers no longer feared that setting off the swaps could put stress on the financial system. Certain parts of the credit-default swap market helped destabilize the financial system during the 2008 financial crisis. Since then, banks and regulators have taken steps to strengthen the market, mostly by making sure that investors can pay out the money they owe on swaps.

Nearly $70 billion of swaps are currently outstanding on Greek debt. But after both sides settle their accounts, the amount that will need to be paid out should be no more than $3.2 billion.

The Greek default swap story has not quite ended, though. Next, an auction has to be held of the defaulted bonds to set a price at which the swaps will pay out. One question is what bonds will be used because most of the old Greek bonds will be replaced on Monday with new Greek bonds.

The swaps and derivatives association said Friday that there might still be old bonds available for the auction, and it added that the new bonds “might satisfy the requirements.” The organization has set the auction for March 19.

It is not the first time the organization has ruled that swaps tied to sovereign debt should pay out. In 2001, Argentina defaulted on its bonds, activating the swaps. Ecuador followed in 2008.
Bianca Bai

There was a lot of uncertainty as to whether what happened eventually with Greece will trigger the CDS. We need the backup insurance to work, not to be averted. Clearing the path would render a huge sigh of relief among many banks, funds and private investors. This means a large portion of funds will be moving again.

End result: ... we are into another round of robust market run, even though the CNBCs and Bloomberg TVs have yet to get around to this conclusion. When faced with a barrage of opinions, you get clouded as to what's important and what's really market moving news. I am not saying how long this bull run will lasts, but we just stepped into one.
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