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What happens to Fairfax deflation derivatives if there is a breakup of the Euro?


beerbaron
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I don't think Fairfax has an answer for this.  My guess is that they are worthless in a breakup.  Certainly any counterparty with any sense will delay and drag the issue through the courts if it can.  I guess it is all in the small print.  Do we actually know *exactly* what the contracts are - i.e., can we read the small print anywhere?

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My reply from another thread:

 

So Fairfax has CPI Derivative Contracts for the EU notionally worth 27.2 billion as per the 1st quarter report.  They're in euros.  I really like these because it seems like the mix of austerity and lack of growth is a recipe for deflation.  But what happens if the Euro falls apart?  I know its a long shot but its not out of the question.  Who wins if that happens?

 

The question was asked at the AGM. Brian Bradstreet answered the question, and he said it was a good question. It is a real risk with the CPI derivatives, but he said there will be some work out solution if the Euro dissolves itself. If I remember correctly he said there may be a weighted measurement of the CPI across various countries. He mentioned that the TIPS market in the Euro is big as well and they'll need a solution if the Euro dismantles.

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My reply from another thread:

 

So Fairfax has CPI Derivative Contracts for the EU notionally worth 27.2 billion as per the 1st quarter report.  They're in euros.  I really like these because it seems like the mix of austerity and lack of growth is a recipe for deflation.  But what happens if the Euro falls apart?  I know its a long shot but its not out of the question.  Who wins if that happens?

 

The question was asked at the AGM. Brian Bradstreet answered the question, and he said it was a good question. It is a real risk with the CPI derivatives, but he said there will be some work out solution if the Euro dissolves itself. If I remember correctly he said there may be a weighted measurement of the CPI across various countries. He mentioned that the TIPS market in the Euro is big as well and they'll need a solution if the Euro dismantles.

 

The security is who their counterparties are.  Brian's answer implies that their  counterparties are outside the Euro zone and should be solvent if the Euro breaks up.  If they can't reach a suitable adjustment, the issue may then go to arbitration. 

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From the Q3 2011 NAIC filing, their counter parties are: Deutche Bank, Citibank Canada & JP Morgan Chase

 

I was under the impression that PIMCO was the one who sold them the contracts. Can anybody clear this up?

 

Secondly, it's a very real threat given that derivatives are a legal contract that follow very, very specific rules and guidelines (just like any other legal contract). If something occurs that is outside the bounds of these limits, it's likely in legal limbo. For small deviations, counterparties will generally work out agreements/compromises to maintain their rapport with clients; however, if you're talking about a multibillion dollar payout from institutions who will already be struggling from such harsh economic conditions, then it's a matter of survival and you can be sure they'll fight it.

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