Banks Bet Greece Defaults on Debt They Helped Hide

Posted by Kendall Harmon

Bets by some of the same banks that helped Greece shroud its mounting debts may actually now be pushing the nation closer to the brink of financial ruin, Nelson D. Schwartz and Eric Dash report in The New York Times.

Echoing the kind of trades that nearly toppled the American International Group, the increasingly popular insurance against the risk of a Greek default is making it harder for Athens to raise the money it needs to pay its bills, according to traders and money managers.

These contracts, known as credit-default swaps, effectively let banks and hedge funds wager on the financial equivalent of a four-alarm fire: a default by a company or, in the case of Greece, an entire country. If Greece reneges on its debts, traders who own these swaps stand to profit.

“It’s like buying fire insurance on your neighbor’s house — you create an incentive to burn down the house,” said Philip Gisdakis, head of credit strategy at UniCredit in Munich.

Read it all from the front page of today's NY Times.

Filed under: * Economics, PoliticsEconomyThe Banking System/Sector* International News & CommentaryEuropeGreece

Posted February 25, 2010 at 1:48 pm [Printer Friendly] [Print w/ comments]

1. little searchers wrote:

This is really sad.  Anyone who makes a bet like this really needs to lose big time.  This is misuse of the idea of free enterprise.

February 26, 12:31 am | [comment link]
2. Daniel wrote:

This is a poorly written article.  It blurs the distinctions between insurance contracts (the credit default swaps), an index based on them, and derivative contracts (options) on the index.

Half of the traders who make bets here will lose.  Derivative trading is a slightly less than zero sum game.  For each seller of a derivative, there has to be a buyer, and only one side of the derivative contract can “win.”  Additionally, the broker/market maker who clears these contracts takes a commission, so that is where you end up with a less than zero sum game.

If this was being played out in the animal kingdom Greece would be a weak zebra in a herd and the derivatives players would be a pack of hyenas culling the herd.

February 26, 2:43 am | [comment link]
3. John Wilkins wrote:

#1 This IS free enterprise.  There is no reason a Libertarian free marketeer should demand the bankers be held accountable.

What would happen if Greece defaulted?

February 26, 1:05 pm | [comment link]
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