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Citigroup’s Willem Buiter thinks failure to trigger these CDS would be catastrophic.

First, he argues that a 50% writedown is indeed a credit event worthy of triggering the CDS.

…It would pass the ‘duck test’: “If it looks like a duck,

swims like a duck, and quacks like a duck, then it probably is a duck.” Specifically, such an event could be characterised as ‘voluntary’ only in the army sense of the word voluntary (“I need three volunteers: you, you and you!”). Were someone to hold a gun to my head I might ‘voluntarily’ hand over my wallet, but in a court of law this event would probably not be determined to be a voluntary gift, but armed robbery instead.

Failure to trigger would all but discredit the entire CDS market.

It is possible that some exceedingly clever lawyers and PR specialist could convince the relevant Determinations Committee of ISDA that a 50% or 60% haircut need not indicate a credit event, but, were this to occur, it would probably do more damage to the EU sovereign debt and CDS market than would have occurred had a credit event been declared and CDS triggered. The reason is that a failure to trigger CDS when, according to common sense, economic logic and commercial rationality, CDS ought to be triggered, would impair the value of CDS as an asset class. In the Euro Area there are more than a trillion dollars’ worth of sovereign CDS outstanding. Market participants (pension funds, insurance companies, banks, asset managers and hedge funds) that have bought CDS as insurance against Greek default would be denied the pay-out on their insurance policies. The response might well be a rush to unload the underlying assets of these Euro Area CDS, the sovereign debt of all vulnerable Euro Area member states. This would be rational contagion par excellence – and it would have been triggered by a failure to trigger CDS on Greek sovereign debt when the sheer magnitude of the write-down on the Greek sovereign debt would have made a credit event the reasonable, logical outcome.

Even worse, it could completely destroy the success of the current proposed plans to leverage the EFSF.

What is more, avoiding triggering CDS when the fundamentals suggest they ought to be triggered, would further erode credibility of EU/EA policymakers. That credibility is already weakened by the slow and piecemeal response to the crisis. But some of the support measures considered currently make a further erosion of policymaker credibility especially problematic. For instance, the success of the proposal that implies that the EFSF provided (first-loss) guarantees for new issuance of EA sovereign debt in the primary market relies on the belief of market participants that such guarantees would actually be honored in the future. Avoiding CDS payouts on technical or lega