New York Times
February 21, 2012
Greece’s debt restructuring is dragging credit-default swaps back into the spotlight.
The last time this financial instrument was on the global stage was in 2008, when the American International Group’s credit-default swaps brought the insurer, as well as the wider financial system, to the brink of collapse. A.I.G. had unique weaknesses, and regulators have started to overhaul the credit-default swap market since 2008.
European policy makers have nonetheless looked warily at credit-default swaps, at least until recently, while they structured the Greek rescue over the last six months.
They aimed for a voluntary debt exchange that would not initiate the default swaps, fearing that payments on the swaps might set off destabilizing chain reactions through Europe’s financial system.
But now, with Europe’s $172 billion aid package for Greece, it appears that the nation is going to take a step that substantially increases the likelihood that its swaps take effect.
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