Why not pull the trigger on Greek credit default swaps? Authorities fear contagion.

A NY Times Dealbook article asks the question of why not pull the trigger on Greek credit default swaps.  The simple answer is fear of the unknown in the form of contagion.

Since financial regulators have not required that banks disclose their current asset, liability and off-balance sheet exposure details on an on-going basis, they have no idea who would win or who would lose if the credit default swaps payout.

This lack of disclosure creates the potential for surprises and the financial regulators are trying to avoid this.

Far better that the financial regulators should have required ultra transparency so everyone could see what the impact would be.

The really important issue here centers on why the European Union cares so much about not setting off credit-default swap triggers in this exchange offer. The absurd lengths European leaders are going to in order to make this “voluntary” does raise a few eyebrows. And I have no really compelling explanations. 

Still, would it be so hard to imagine that the Eurpean Union wants to avoid setting off the swaps because of aggregate exposure among European banks to Greek and other European sovereign debt? For example, what if European banks have all been hedging their sovereign credit-default swaps with each other. If that proves to be the case, a German bank with seemingly modest net exposure to sovereign debts, for example, could really be heavily exposed because the hedge is with a French bank? 

And let us stop with the “Greek C.D.S. market is small” argument. Yes, the publicly acknowledged market is small. What about the bespoke market? 

Moreover, what would the collateral posting requirements be for European banks if non-Greek sovereign debt was downgraded after the triggering of Greek credit-default swaps? What if we also add collateral posting requirements that result from European banks being downgraded?