by Richard Barley
Wall Street Journal
June 27, 2011
With no good options, Europe's policy makers are caught between Scylla and Charybdis. They are determined to avoid a Greek default to head off financial contagion. But while they may not manage to prevent ratings firms from declaring their voluntary rollover plan a default, they may well avoid triggering sovereign-credit default swaps. That could be a nasty combination.
Like other fallout from the Greek crisis, the risk isn't about Greece, but about the knock-on effect. Despite scares, CDS settlements during the crisis have been smooth. While in Greece's case there are $79.2 billion worth of swaps outstanding, they net down to a manageable $5 billion of payments if CDS are triggered, according to Depository Trust and Clearing Corp. data. But politicians have railed against sovereign CDS as a cause of Europe's woes. They won't want to hand big payouts to those with outright "short" positions. The thinking: If speculators are rewarded for betting against Greece, they may target Spain and Italy. Contagion would ensue.
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