November 13, 2011 · 0 Comments
By Dean Baker:
Floyd Norris has an interesting piece discussing the credit default market in European debt. He notes that the volume of issuance has not increased in recent months even as spread between the interest paid on the bonds of heavily indebted countries and Germany has increased. (France is an exception, which is easily explained by people wanting to bet that its situation will deteriorate.)
Norris explains the limited issuance as likely being the result of the way in which Greece’s debt is being restructured. The banks holding Greek bonds are being coerced by European to accept 50 cents on the dollar. However, this is not considered a default event that would trigger the payment on a credit default swap. The reason is that the banks are agreeing to accept this lower payment, the Greek government has not actually defaulted on a payment owed. Since this would likely be the pattern for the resolution of other sovereign debt crises, a credit default swap will be of little value.