The failure of Icelandic banks Glitnir and Landsbanki add to the list of costly and complex tasks facing the derivatives markets now that more costly credit-default swap contracts have been triggered, The Financial Times reports.
Barclays Capital estimates that the collapse of a counterparty such as Lehman can be expected to cause system-wide losses of about $29 billion to $100 billion.
However, that number is based on an assumed recovery rate for Lehman bonds of 40 cents in the dollar the market is now expecting a recovery of just 10-15 cents. “A lower recovery rate will push up potential losses,” says Puneet Sharma of Barclays. “If the recovery was 10 per cent, the loss would be one and a half times higher.”