Um, isn\’t this man supposed to know something about finance and the City?
creating common rules on the trading of toxic credit default swaps.
Toxic? CDSs?
What is he on about? Around and about the only credit market that remained open and liquid during the crisis is \”toxic\”? The market in which hedge funds in the last few weeks have lowered the cost to Greece of issuing new debt is toxic? A market which has enabled banks holding hundreds of billions of Greek debt to insure it against default is toxic?
What is he blathering about?
I have a feeling that he\’s got confused between CDOs (those securitisations of mortgages) and CDSs….the former have often been referred to as \”toxic waste\”.
A market which has enabled banks holding hundreds of billions of Greek debt to insure it against default is toxic?
Not sure I agree with you here Tim. Two points:
1. I’ve no desire for Greece to default, but it would be interesting to see if the CDS sellers could actually find hundreds of billions to compensate the banks if a default occurred (that’s interesting as in interesting times). Who are these CDS sellers? Other banks? Hedge funds financed by the banks? Has the risk really been spread around as much as we think? It certainly hasn’t been reduced. Please note that neither the taxpayer being CDS seller of last resort, nor central banks printing money to cover bank losses, are acceptable.
2. If the CDS market didn’t exist, and assuming banks could not insure against default elsewhere, what would have happened differently? Either they wouldn’t have lent this money to the Greek government in the first place or they would have charged much higher interest rates. If this had happened 10 or 20 years ago, Greece wouldn’t be in the mess it is now. To be clear, the problem in Greece is not that people may stop lending them money today, but rather that we did lend them money in the past.
‘ The market in which hedge funds in the last few weeks have lowered the cost to Greece of issuing new debt is toxic? A market which has enabled banks holding hundreds of billions of Greek debt to insure it against default is toxic? ‘
Without realising it you are actually making the case for the European leaders who see the CDS market as evil. If they got their way naked CDS would be banned and the rest heavily regulated. If you believe that hedge fund activity in the CDS market led the yields in the underlying bond market down, then the CDS market must have pushed the yields up, which is what the critics say.
I believe fundamentals led the yields on Greek debt up as without IMF or other European help default is almost inevitable. Investors should be able to hedge their investment through CDS, but it is far from clear that naked CDS serve any useful purpose. With CDS being an across the counter trade who knows if sellers have the capital to meet calls.