Friday, October 28, 2011

Does the Greece sovereign debt "haircut" show that credit default swaps are useless?

CDS or credit default swaps, are used to protect, or hedge, the owners of bonds against the event of a default by the issuer!

Credit default swaps or CDS have been used here in the past to look at how the global markets viewed the potential for an issuer of debt, such as Greece, to default on its obligation to pay.

Like any insurance, the greater the perceived risk, the more expensive the CDS contract.

Now a Greece sovereign debt default is being instituted in such a way that it will reportedly not trigger the CDS owned by investors as hedges to pay-off.

If because of this CDS is proven to be worthless as a hedge, either a new hedging vehicle will need to be developed and/or borrowing costs for issuers will have to go up!

Read more about this very important global story at Mish's Global Economic Trend Analysis.

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