Greece Trying for Bigger Private Sector Writedown. Will CDS Be Triggered?

November 28th, 2011 by

Shop for the holidays at

Among the many disturbing developments that are hammering investor sentiment of late was news today that Greece is pushing for a further writedown in debt held by the private sector to 75% from the 50% that had been agreed.  The signficance of this tidbit comes from the renewed possibility that Credit Default Swaps (CDS) written on Greek sovereign debt could be triggered.  While the total amount of CDS on Greek debt is reportedly small, the counterparty risk such an event brings up is exactly what EU policy makers had hoped to avoid when they negotiated the initial 50% private sector haircut.

The Reuters article notes that “there are 206 billion euros of Greek government bonds in private sector hands – banks, insitutional investors and hedge funds – and a 50% reduction would reduce Greece’s debt burden by some 100 billion euros.”  A 75% reduction would reduce Greece’s debt burden by some 154 billion euros.

The possibility that private sector Greek bondholders could experience such a large loss will no doubt heighten the flight out of other at-risk European sovereign bonds.

An unfortunate side effect to the Greek writedown is the similar treatment that other countries are eyeing for themselves.  It has been reported that Ireland has been exploring a reduction in the amount it owes.

For precious metal investors, this particular development is just another in a string of bad news impacting all financial markets.  The possibility that Greece’s attempt to further reduce its debt will cause an increase in investor’s exodus out of Eurozone related financial paper means that recent USD strength is likely to persist.  It is worth noting that after a month of defying expectations, the EUR-USD is apparently crumbling, down from 1.35 to just over 1.32 this week alone.  This has clearly weighed on precious metal prices.