June 2, 2011
A year after Greece was bailed out by its euro-area partners and the IMF, even more help is being considered, given the impossibility of the Greek government raising money from the bond markets in 2012 as originally envisaged. Despite objections from the European Central Bank to any form of debt writedown, German politicians have been airing this idea as they face opposition from taxpayers at home to opening their wallets again. The terms used—“restructuring” or “reprofiling”—are fancy words for saying the money will not be paid back in full or on time.
But what would they mean for credit default swaps (CDSs)? Under a CDS, one party seeks to protect itself against the default of a bond issuer by paying an annual sum—the equivalent of an insurance premium—to someone else who wants to take on the risk. Just as house insurance will cost more for those living next to a fireworks factory, a CDS becomes more expensive when the finances of the bond issuer deteriorate (see chart).
As with any insurance contract, however, there is scope for dispute about when a claim can be made. Under a sovereign CDS, a claim depends on a “credit event”, which is defined broadly as a failure to pay interest, a moratorium on principal repayments or a restructuring of the debt.
More
No comments:
Post a Comment