WASHINGTONPOST.COM European government leaders are fighting to contain the debt crisis in Greece and other nations; they are looking for the owners of Greek bonds to take a significant reduction in what they are owed.
If owners of Greek debt are seen as taking a voluntary cut in what they are owed, the credit default swaps would not have to pay off. There were contracts insuring some $30 trillion worth of financial instruments worldwide as of the end of last year. Credit default swaps on Greek debt are a much smaller market, with only $3.7 billion worth of contracts guaranteeing the equivalent of $75 billion in the country’s debt.
But there are risks to the financial system, if it is decided that the haircut taken by Greek bondholders is voluntary and therefore that credit default swaps do not need to pay out.
If owners of Greek debt are seen as taking a voluntary cut in what they are owed, the credit default swaps would not have to pay off. There were contracts insuring some $30 trillion worth of financial instruments worldwide as of the end of last year. Credit default swaps on Greek debt are a much smaller market, with only $3.7 billion worth of contracts guaranteeing the equivalent of $75 billion in the country’s debt.
But there are risks to the financial system, if it is decided that the haircut taken by Greek bondholders is voluntary and therefore that credit default swaps do not need to pay out.
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