Final arbiter in Greek saga is untested, private body

by Satyajit Das

Financial Times
June 22, 2011

In the film Casablanca, Rick (Humphrey Bogart) tells Captain Renault (Claude Rains) that he came to the city “for the waters” because of his health. Informed that they are in the desert, Rick ironically rejoinders that he was “misinformed”. Investors and banks that purchased Greek sovereign credit default swaps (CDS) to protect themselves against the risk of default may find that they have been similarly misinformed.

The “hedges” may not provide the protection sought. While net outstandings of Greek sovereign CDS are modest (around $5bn), the current imbroglio raises important questions about the role and efficacy of CDS contracts generally.

The EU’s linguistic gymnastics, redefining default as “restructuring” or “re-profiling” and the structure of any final deal on Greek debt has real implications for the arcane workings of the CDS market.

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