WTF: Greek debt vs. CDS

Thankfully, you don’t have to know what a CDS is (which I actually had to look up because I know nothing; turns out its a credit default swap) to understand the gist of it. The gist? Greece is so fucked right now. On a related note, why oh why did the EU think a shared currency was a good idea anyway? Like really somebody explain this please. I’m sure they had a decent reason to think so. Right? I mean of course they did. Riight?

mathbabe

Just to be clear, if I’m a hedge fund who owns Greek bonds right now, and say I’ve hedged my exposure using CDSs, then why the fuck would I go along with a voluntary write-down of Greek debt??

From my perspective, if I do go along with it, I lose a asston of money on my bonds and my CDSs don’t get triggered because the write-down is considered “voluntary”. If I don’t go along with it, and enough other hedge funds also don’t go along with it, I either get paid in full or the CDSs I already own get triggered and I get paid in full (unless the counterparty who wrote the CDS goes under, but there’s always that risk).

Bottomline: I don’t go along with it.

None of this political finagling will change my mind. No argument for the stability of the European Union will change…

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