Allied Irish Banks credit event looks likely, says SocGen

Just to clarify on some previous comment, if you trigger the Sub contract, you automatically trigger the Senior contract too, simply because the credit events in the two contracts are exactly the same!

I agree that Fishknife's analysis (below) is likely sound. Buyers of CDS protection generally prefer not to declare a Restructuring Credit Event if they believe they can wait for a "hard" Credit Event prior to expiration of their contract.

We may not need to wait for a failure to pay. It seems likely that a restructuring credit event has been triggered by the “subordinated liabilities order” – see http://www.aibgroup.com/servlet/ContentServer?pagename=PressOffice/AIB_Press_Releas/aib_po_d_press_releases-0_08&cid=1302773148878&poSection=AR&poSubSection=paDA&position=first&rank=top&year=2011&month=4. This surely fits the definition of an event “announced … by … a Government Authority in a form that binds all holders of such Obligation” from 4.7 (Restructuring) of the credit derivative definitions. The order extends the maturities of the sub debt – clearly falling into 4.7 a (iii) of the definitions. It also makes interest payments on the sub debt discretionary. This doesn’t seem to be covered explicitly in the credit derivative definitions, but perhaps falls into 4.7 a (i) - a “reduction in the rate or amount of interest payable”.

Though I like the "standard" CDS terms in which default of sub debt triggers CDS on both sub and senior debt, it may be that this feature no longer makes sense for CDS on senior debt of European banks. The governments and regulators have made clear that sub debt is to be thrown to the wolves. To isolate the senior debt risk of the banks, the CDS Credit Events should not be tied to the sub debt.