Most of the financial headlines have recently focused on the problems in various government bond markets across the Eurozone. There are real concerns that we might see the like of the Greek and Spanish Governments having to default on the terms of their debt issues. These issues has led to great interest in the credit default swaps (CDSs) market. These are a type of insurance against a nation defaulting on its borrowings. They allow a bond investor to pay a premium in order to cover the risk that one of the bond issuers in their portfolio might hit financial difficulties. So they were created to allow investors (like pension funds) to manage their risk. However, in recent years they have become widely used by financial market traders to bet on various countries getting into a financial mess resulting in the risk of default on their bond issues. Put simply, traders are betting on the failure of a sovereign state (like Greece, Spain or Portugal). There are now calls to impose much tougher regulation on the CDSs market. The regulators will want to see much better public information available and also far greater liquidity in the market. At the moment the CDSs market is "very thin" which makes their prices far more volatile than the underlying asset (Government bonds) that they should be tracking. The truth is that even without the CDSs market the sovereign debt market would still be in a state of crisis. As long as governments are allowed to run massive fiscal deficits the confidence in their bond markets will be very limited.
Feb 23, 2010
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3 comments:
There definitely is a scope of the CDs market to develop in the coming years, but I think its real growth is expected in developing countries rather than developed countries like spain and Greece. These countries althought may have a huge financial deficits they are covered up by European Union should they head towards a soverign default.
Lesser developed countried which are not covered by a Union like EU will have higher uncertainity of default hence more opportunities for market players to bet.
There definitely is a scope of the CDs market to develop in the coming years, but I think its real growth is expected in developing countries rather than developed countries like spain and Greece. These countries althought may have a huge financial deficits they are covered up by European Union should they head towards a soverign default.
Lesser developed countried which are not covered by a Union like EU will have higher uncertainity of default hence more opportunities for market players to bet.
In late 2009, Greece offered a Eurobond to China in a hope to sort out Greece’s public finance. In addition to this, the rating on a Eurobond from Greece would not be AAA. It is sad that there would be a need to give a premium on a risky governmental share which is thought to be risk free. Moreover the developed nations like Japan, USA, Germany, UK etc are seeking help from emerging economies like China. Thus it just goes to show, how countries like China are improving its economy and GDP. Therefore the main aim of this swap is to improve investor confidence, which after the recession has been affected greatly. Measures like these will improve investor confidence, nevertheless help from Brazil, Russia, India and China will help the global economy. One way that they can give support is through buying International bonds.
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