Wall Street Journal
May 24, 2011
The cost of insurance against a Greek sovereign default, as measured in the price of credit-default swaps written on the country's debt, hit a fresh all-time high of close to 15% Tuesday. Bond markets continue to see no alternative to a restructuring of the country's huge debt.
But if Greece does restructure, a determination to keep speculators who bet against the country's creditworthiness from collecting could mean that the protection bought is worthless, some analysts say.
Credit-default swaps work like a default-insurance contract, but a buyer doesn't have to own the underlying asset being insured. If a borrower defaults, the seller compensates the buyer for the amount they have lost, or would have lost, as owners of a bond that won't be repaid.
Payouts may also happen if a borrower restructures its debt, by postponing repayment, for example, in a way that is binding on all debt holders.
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