As the Greek government defaults on its bonds, holders of Greek credit-default swaps will probably get nothing as the default will be “selective” and will thus not officially trigger a default. This not only hurts banks who thought they were hedging by buying the CDSs, but also Portugal as it will discourage banks from holding its debt if they cannot hedge against a default. This will raise yields and increase volatility.
Tag Archives: Credit Default Swaps
Greek Tragedy
The Greek 10-yr gov’t bond yield is 14.7%, 11.5% above comparable German bonds. The 2-yr Greek note is trading at 22.2%, 20.45 % above the German 2-yr note. The cost of insuring Greek sovereign bonds jumped to 1,422 basis points based on the Bloomberg London 5-yr credit default swap. These swap prices signal more than a 68% chance of a Greek debt default within 5 years! The Euro crisis continues.