The Smell Of Derivative Credit Cross-Defaults In The Morning…

smell collapse…it smells like, derivatives napalm bombs (with apologies to Robert Duvall and Francis Ford Coppola).

Banco Espirito Santo is in some deep kimchi.  And so are the investors in the bonds issued by the banks.
And so are the investors who are unwittingly exposed to these bonds and the derivatives tied to these bonds.  



Submitted by PM Fund Manager Dave Kranzler, Investment Research Dynamics

Let’s not forget there’s also OTC credit default swap contracts tied to the bank’s senior secured credit:   Nomura Threatens Cross-Defaults.

We probably won’t find out who is left standing naked when this particular tide flows out because I am betting that the ECB/IMF/US comes to the rescue for the specific purpose of preventing a financial napalm bomb daisy-chain from starting.  But at some point smart investors will catch on (we hope for their sake) and unload anything with any possible hint of derivatives exposure…