Greek Default Fallout

NEW YORK (Dow Jones)--A committee of the International Swaps and Derivatives Association voted unanimously to meet on Monday at noon London time to address matters related to the decision it made Friday to trigger credit-default swaps on Greek debt. The committee's plans to reconvene were detailed in a document published on the ISDA's website Friday; the unanimous decision by the committee to trigger Greek CDS was contained in the same document.
The committee has elected to hold an auction to settle the $3.2 billion in net CDS on Greek sovereign bonds currently outstanding. That auction will be held March 19.
An ISDA spokesman said the committee will meet Monday to discuss what debt securities will be eligible to deliver into the auction to receive payouts on CDS. He said it was unclear whether a decision on the debt eligible for delivery would be made on Monday or if it may take longer.
In a statement Friday, the ISDA requested that market participants submit details of any specific debt securities they would like to be made eligible for delivery into the CDS auction.
After the auction sets a value for Greek debt, holders of CDS will be paid an amount equivalent to par minus the recovery value assigned to those securities. The debt that is expected to be eligible for delivery is Greece's newly issued bonds, available as of Monday, and foreign-law debt.
It is expected there would be a maximum of $3.2 billion in net payments between buyers and sellers of CDS protection on Greek debt. However, that figure assumes that all trading parties meet their financial obligations.
"The net figure of $3 billion to $4 billion in payouts only exists in a perfect world of flawless performance by all counterparties," said James Rickards, senior managing director at New York investment bank Tangent Capital. "We'll soon discover if those who wrote the insurance have the reserves to back up their bets in full."
My view:

The market faces a moment of truth on March 19.

What will the value of the Credit Default Swaps be?

Will the counterparties be impacted as they did not back up their potential claims adequately?

While others have touched on this subject of Greek default, I have not seen any calculations to date estimating the impact of these payments on European bank lending.

Keep in mind that many banks are still leveraged at 30 to 1 or higher.

This means a $3.2 billion loss has an impact on bank lending of nearly $1 trillion.

Once the market figures this out, it is my assertion that we will see a substantial pullback in stocks and rise in European bond yields resulting, in time, a cascading of sovereign debt defaults.