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By: Richard Portes
By: Wolfgang Münchau
By: Wolfgang Münchau
By: Paul De Grauwe
By: Paul De Grauwe
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By: Paul De Grauwe
Sorting out the Greek crisis remains the absolute priority in the short-term.
By: Erik Jones
The simple fact of the matter is that Greece is having a fiscal crisis. It would have had that crisis whether or not it was in the eurozone.
By: Henrik Enderlein
The case against bailing out Greece.
The political pros and cons for no support, a European rescue and a call for the IMF.
By: Wolfgang Münchau
Not all policy solutions are possible in a monetary union. There are severely constitutional constraints.
By: Ansgar Belke
The exchange rate "pain threshold" for German exports is at $1.55 to the euro.
By: John Lewis
Countercyclical but deteriorating with EU membership.
By: Wolfgang Münchau
The real bullet is not the EMF, but the exit clause, which could become a self-fulfilling prophecy.
This is the first in a new series of regular briefing notes on important issues facing the euro area. In this briefing note we are asking whether the euro area could ever break up. We think not. But we are not as certain as we used to be.
In a credit default swap (CDS), the buyer contracts to pay the seller a regular premium in return for a commitment that the seller will pay out in the event of a default on a specified financial instrument, typically a bond. The market began in the late 1990s as a pure insurance market that permitted bondholders to hedge their credit exposure "“ an excellent innovation.
But then market participants realised that they could buy and sell "?protection' even if the buyer did not hold the underlying bond. This is a "?naked' CDS, which offers a way to speculate on the financial health of an issuing corporate or sovereign without risking capital, as short-selling would do. That was so attractive that soon the market was dominated by naked CDS, with a volume an order of magnitude greater than the stock of underlying bonds.
A good side effect of Greece's troubles is that politicians, regulators and central bankers are finally paying serious attention to this market. For two years, I have been pointing out the destabilising effects of naked CDS in the financial crisis and the dangers in the use of these instruments as a speculative device. Only now is this taken seriously.
Much of the media reaction, however, simply puts the line of the big banks that profit greatly from this market. It deploys clichéd rhetoric and misinterprets data, with little regard to research or to the views of informed market participants and analysts who are not on the payroll.
Critics of naked CDS want to "?shoot the messenger' "“ why not, if he isn't telling the truth but spreading false rumours? We are "?blaming the referee', "?blaming a thermometer for the temperature', we want to ignore the "?canary in the coal mine'. "?Banning naked CDS won't stop bond prices from falling' "“ indeed, but what do they contribute to price discovery? As for the politicians, they are just scapegoating, trying to deflect attention from their own failings.
Let's look at naked CDS seriously, ignoring Greece. We start with the justifications.
Like almost all the financial innovations in recent years, naked CDS are said to be a beneficial move towards more complete markets. And speculation, we are told, is essential to the proper functioning of markets. This is simply market fundamentalism that ignores masses of research on destabilising speculation as well as a key lesson of the financial crisis, that some innovations have been dysfunctional and dangerous.
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