An English translation by Bernard Bouvet of my post “Les spéculateurs sur la dette grecque, neutralisés”.

Last Friday’s ruling by the International Swaps and Derivatives Association (ISDA) that the much talked about Greek debt swap, or the so-called private sector initiative (PSI), does not represent a “credit event” and, therefore does not trigger Credit Default Swaps (CDS) payments, constitutes a remarkable victory against the markets, the first real victory in an asymmetric war started exactly five years ago at the height of the subprime mortgage crisis.

With this decision, sovereign debt speculation is being brought to heel: being effectively neutralised, since a partial default (private holders of Greek debt getting 46.5 cents on the euro), alongside a debt rescheduling and a readjustment of interest rates guided less by speculative motives and more by an objective risk evaluation (taking into consideration the European guaranty), won’t be viewed a “credit event”. If such an array of reasons for depreciation is not viewed for what it should be, then nothing will from then on, at the very least as far as CDS contracts on euro sovereign debts are concerned.

It was long overdue for debt buyers, more accurately, lenders to sovereign states, to acknowledge that the rate tagged onto a loan – the “coupon” – already includes a risk premium, that is calculated specifically to compensate the preferably rare occurrences at such times when the advanced funds won’t be reimbursed, or only partially, such as in Greece’s case.

The sovereign states, having until now unconditionally and scrupulously followed the diktats of the sovereign debt speculators, desperately needing a victory to re-stamp their authority, should be grateful to the ISDA. Its fifteen members committee’s decision was apparently unanimous: an impressive feat, admittedly. What could have been the motivating factor being the consensus? With no explanation – none will be provided, we are being assured – one can only speculate (pun unintended).

The most likely scenario: as representative of all players in the CDS market, the ISDA had to protect the conflicting interests of two very different types of speculators, those who contracted naked positions on the Greek debt (in other word, speculating on Greece’s default without really being exposed to the risk of a loss), and those issuing CDS (with no adequate capital reserves, as permitted under the legal framework – or rather in its very absence). An overall process of risk analysis probably swayed the needle in favour of the “insurers”, their downfall proving more costly and a source of an increase in systemic risk (risk of a collapse of an entire financial system) than the failure of the bettors (the ghost of AIG still haunts memories – that insurance company infamous collapse in the fall of 2008 brought about by the reckless issuance of CDS in the demise of Lehman Brothers and its collateral victims).

If my hypothesis is true, the neutralisation of sovereign debt speculation happened not so much thanks to the sovereign states themselves, but rather to the two opposite types of speculators in that market neutralising each other. With all due respect, if one was expecting the sovereign states to show, once again, some courage, one would probably have to wait indeed a very long time!


  1. Dear Mr. Jorion, I heard you in Maastricht and had a short conversation with you in Dutch (my language), the subject was basic income as a possible beginning of a solution to come to a successor of the capitalist system that is coming to an end. Key point of my thinking in this matter is twofold: 1. a correction of the perverse world-wide pricing system, as prices are biased for the very different costs of living in the various parts of the world and 2. primitive costs of living for every person in the world, as a grant will bring a lot of rest in society that will lead to inventions in de the broad scale of social life. The playability of such a measure would be no problem as it is for the Netherlands ± 20% of BNP, and on the other hand it is paid now also because there is no starvation any more. This rest in economic activities and the consequent deglobalisation c.q. regionalization will redress the role of money automatically.
    BGE has to be thought with to grasp it cf. Götz Werner, the German dm-enterpreneur.

  2. Dear Mr. Jorion,

    I posted this one somewhere else, with regards to what now seems to be the Spanish problem, we should really start to annihillate the roots of all te current economic woes before Europe will be completely ruined by the financial vultures (at the other side of the big water?):

    The main fault lies with money and especially the money maffia (part of the 1%) that is now trying to regain as much as possible of their recent losses by betting (hedgefunds) and influencing (rating agencies) the financial markets and position of Europe as a whole, making use of a small flaw in the European political system.

    Basically the Euro zone is economically a lot stronger than the US. (trade balance is far better)

    These debt whitewashers should be outlawed and put on an uninhabited island with lots of Monopoly games and without internet so than they can play without damaging the lives of innocent people by doing so.

    I hope that Germany will turn round soon and Europe will start to fill those holes in government’s accounts with “quantitively eased” money …after all those holes were created by the lenders by using “fake” money anyway. (paper profits on money transactions) and as long as you see to it that there is no cost/wage inflation I think Europe should be all right.

    The European people should not have to pay a high price, for bailing out those lenders/vultures with their derivative positions (a material consequence of too liberal financial economic policies, started of by Reagan /Thatcher- The City/Wall Street)), which derivates were created in the American market anyway and which put us all in the mess, we find ourselves in now.

    The European people (and probably also the banks) were basically of the opinion that the US had a sound mortgage system like the European one, which appeared not to be the case and which cost us dear. They bought American debt, we now know what the consequences were/are…….

    • There is one big difference between Europe and the US: Euro is not the central pivot of the international monetary system while USD is. The USD enjoy therefore a big advantage to finance the trade deficit because the FED can almost “print” as many notes as it wants.

      As long as this situation remains, Europe will be more vulnerable to the financial symptoms of the crisis even if the basics are better.