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Major banks of the world “attack Bank of Portugal”

Headline news this morning is the fact that the world’s major banks are meeting in London today to “evaluate the problems created by the Bank of Portugal” in its controversial ‘bond dump’ (click here) three weeks ago.

Running the story on its front page, Diário de Notícias explains the meeting will be going ahead at ISDA, the International Swaps and Derivatives Association, in the City, and involve the Bank of America, Barclays, BNP Paribas, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan Chase, Morgan Stanley, Japanese holdings company Nomura, investment management company Pimco and a number of other big-name financial institutions.

The issue is whether or not the ‘bond dump’ constitutes something in the sector known as a “credit event” (when an institution suddenly defaults on a ‘significant transaction’, in this case senior bonds worth up to €2 billion).

“If it does, then insurance contracts on the bonds, known as credit default swaps would be triggered, and bondholders can cash in on their insurance policies”, explains Bloomberg financial writer Mark Gilbert.

But the scenario comes with a note of warning: If the ISDA rules that the bonds dumped by Costa “are effectively in default, then in theory a legal clause called cross default kicks in – and more than 50 Novo Banco bonds worth almost 18 billion euros might be deemed to be in default”.

Gilbert admits that the scenario would “bring chaos for sure. But it might bring the Portuguese central bank Portugal to its senses”.

It “might even persuade the authorities” to reverse the decision that is already causing investors to pull out of Portuguese debt bigtime.

In his detailed article in Bloomberg View yesterday, Gilbert was pinning his hopes on today’s meeting lighting the touch paper on chaos.

“The body that helps oversee the derivatives market has an opportunity to help right this wrong”, he explains. “But to do so, it will first have to make the situation even worse”.