Anorak | Don’t Sweat the Greek CDS

Don’t Sweat the Greek CDS

by | 23rd, February 2012

NOW that we can see what the Greek bond deal looks like we can now see that the Greek CDS contracts will almost certainly be triggered. These are those toxic waste derivatives which are going totally destroy western capitalism. Man.

Sadly for the conspiracists they’ll do absolutely no such thing for two reasons.

The first is that as the FT reports , there’s piss all of these contracts around.

The use of collective action clauses in Greek bonds, as part of the country’s sovereign restructuring, seems set to trigger credit default swaps. For the $3.2bn of net notional still outstanding on the contracts, it’s been a long road to a credit event.

This is less than 1% of the outstanding bonds. It’s just not an important number.

However, the second reason it really, really, doesn’t matter is a little more complex.

A CDS is a credit default swap. Essentially, an insurance contract. I’ll give you some money now, some more money every six months, and then if my bonds go bust then you pay me the value of the bonds. If they don’t go bust then you keep the money I’ve given you. It’s insurance.

Now these contracts did bring down a large company, AIG Financial Products, those few years back in the crisis. So why won’t they do the same now?

The basic way a CDS works is that if my bond starts to lose value, which is pretty much the same as saying the chance of it going bust is rising, we don’t actually wait until it really does go bust for you to pay me. What you actually have to do is post collateral every day. If the value goes down by $1 then you must put $1 in my account. If it rises by $1 then I send you back$1. So whatever the market says is the likely loss at any one time has already moved bank accounts. It hasn’t changed hands legally, it’s still your money, but it’s in my bank account, not yours.

That’s the way it normally works: except,

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Posted: 23rd, February 2012 | In: Money Comment | Follow the Comments on our RSS feed: RSS 2.0 | TrackBack | Permalink