The first domino falls

The Allied Irish Bank has been determined to have officiallyeffectively defaulted:

The International Swaps and Derivatives Association (ISDA) yesterday said that a “credit event” had occurred on Allied debt, meaning the bank has effectively defaulted on its debt, a situation the Irish government has gone to extreme lengths to avoid. Credit default swaps (CDS) sold on Allied subordinated bonds and, crucially, its senior debt, have been activated by the decision of the ISDA determinations committee that decides whether a borrower has defaulted.

We should not be surprised that just as the rules about accounting for failed assets have been bent, the rules for being in default are also being actively danced around. But those interested in collecting on their derivative bets are not going to be inclined to permit a zombie bank to continue the charade enabled by the government regulators.

In tangentially related news, it appears that Bernanke finally blinked. There will be no QE3, at least not for the time being. There will, however be QE Lite, which is totally different because it will not be called quantitative easing and will be done on a smaller scale. For the moment.