Why the Market is More Weary of the ISDA than the Actual Greek Bailout

For today's comment, in honor of Greece's 54% "voluntary" hair cut from its creditors, I rehash my comment from early December (http://webbpicks.blogspot.com/2011/12/tues-12611.html) on the importance of whether the International Swaps and Derivatives Association or "ISDA" deems Greece's "voluntary" hair cut as a "credit event", thus triggering credit default swaps or "CDS". If the ISDA doesn't recognize these CDS as being triggered for Greece's bailout, then investors are going to call into question the value of all credit default swaps on every country/companies and whether these investors have actually "hedged" their exposure. If these CDS don't pay out when bonds have technically defaulted (through a 'voluntary' hair cut), then what's the point of even hedging these in the first place. Investors are now going to reprice "risk", thus leading to a higher risk premium, thereby requiring a higher return for their investments, and could cause volatility in the markets to rise.

On a side note, as to how different the markets have been behaving since September through November last year, when 1-3% dives/rises in the market were becoming common place. Courtesy of Jeff Staut, Raymond James, the S&P 500 has now gone 35 trading sessions in 2012 without suffering a 1% down day. There have been 12 other years since 1928 whether the S&P 500 has traded higher for 30 sessions or more without a 1% down day. In all but one of those occurrences, the S&P 500 was higher at year's end, with a median gain of more than 15%.