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Monday, June 06, 2011

Mansori: Betting On the PIGs

by Calculated Risk on 6/06/2011 06:58:00 PM

Kash Mansori at the Street Light looks at some interesting data released by the BIS today on who owns the debt, and who sold the default insurance, for Portugal, Ireland and Greece: Betting On the PIGs. It ends up most of the debt is owned by European creditors, but US institutions are more exposed to a default. Kash writes:

If Greece were to default, for example, approximately 94% of the direct losses would fall on European creditors, and only 5% would fall on US creditors. However, US banks and insurance companies would have to make about 56% of the default insurance payouts triggered by such an event, while European agents would make only 43% of those payouts.
US and European financial institutions are likely to have very different incentives as negotiations regarding debt restructuring and reprofiling proceed. US banks and insurance companies are surely delighted with the "soft restructuring" that is currently being discussed.
In essence, European firms have been betting that a PIG default will happen sooner rather than later, while US firms have been betting that default would happen later or not at all.
It is interesting that European institutions were more willing to sell default insurance for debt issued by Ireland and Portugal than for Greece ... probably from experience.