No longer surprised. Wankers.

February 25, 2010

”Credit Default Swaps”, ”iTraxx SovX Western Europe index”-terms that mean nothing to me.

Great way to describe tools  which allow banks to bet on the failure of the nations whose economies they have crippled. Noone will ever notice, if you use words noone understands.

When George Osborne is relying on ‘wealthmakers’ to resurrect our economy, shouldn’t he be asking who they are ‘making wealth’ for? He says he will be tougher than Thatcher. Tougher on who?



  1. A credit default swap is a derivative. Suppose Greece has issued a bond worth 100. You hold the bond. You are worried that Greece might default. You can go to a bank and buy a derivative that entitles you to sell that bond to the bank for 100. That way, even if Greece defaults (making the bond worth 80), you can get 100 from the bank and make the take the bond.

    The bank will charge you a premium for this swap because it passes Greek default risk to it. Maybe the bank charges you 5.

    From your perspective, the credit default swap (CDS) is performing a “hedging” function: it protects you from the risk of Greek default. I doubt many people would find that offensive: it is essentially insurance.

    But there is no reason why CDSs can’t be purely speculative transactions. For example, if I was confident about Greece’s stability, I might play the bank role on a CDS, charge you a premium of 5, hope that there never is a default and I get to keep the premium. Similarly, if I were pessimistic about Greece, I might buy CDSs thinking that, if there is a default, I could go and buy Greek debt for 80 and immediately sell it to the CDS counterparty for 100 making a profit.

    The final thing is that the CDS market will itself have an effect on the price at which Greece raises debt. Suppose speculators are not confident about Greece and are buying CDSs heavily. That will tend to drive CDS premiums up. If Greece now launches a bond issue then investors in that bond issue (who want to buy CDSs to hedge their investment just like the first example I gave) now see that the price of their credit protection is going up. They might have to pay 10 rather than 5 to buy their CDS and they are likely to want a higher interest rate on the new Greek bond to compensate them for this increased cost. The result is that increases in CDS prices will tend to drive up the price at which Greece borrows.

    I don’t agree that this activity is immoral. It is nothing more than free trade in a commodity (CDS protection). If Greece truly is on the rocks then it is quite right that it should have to pay a higher interest cost (because lending to Greece is a risky proposition). If Greece is not as badly on the rocks as the speculators are saying then the speculators will lose money on the CDSs they buy and will have to chalk it down to experience. That strikes me as free trade and I do not agree that questions of morality arise here.

    • ‘Free’- free for who?
      You don’t think there is anything immoral about the banks, whose irresponsibility has been at the root of worlwide economic collapse-betting on the failure of the nations their actions have undermined?
      Immoral doesn’t even begin to describe it.

      As for ‘free market economics’-would that the be free market economics, which depends entirely on the relationship between consumer and the market. The free trade which is a mechanism to enable money to flow round the economy. Yeah, I believe in free market economics too. What you are describing is nothing like free market economics.

      What’s moral and what’s legal, are two very different things, as ‘regulation’ of our derivatives markets have shown very clearly.

    • Up to the end of the third paragraph I agree. There seems to be nothing wrong about taking out some insurance in case a loan you made has gone bad.

      What worries me is that a whole market can be set up over this, and that market can effect the price of Greek debt. The problem is of course that in the markets confidence is everything. Taking out a CDS on a company/nation directly increases the chance of it paying out. This can’t be moral in my eyes. Especially when we are talking about the economies of whole countries here.

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