Credit Default Swaps (CDS)
For many of you, today’s topic might not be the most exciting one of the year, so if you want to pass this one by and continue watching the Olympics, I understand. For the rest, I’ve got a topic you need to understand.
Greece’s economy is crumbling, and many other countries are trying to stay fiscally afoot, causing headlines about economic crises to slowly creep back to the front page. This time around, you will often find the phrase “credit default swaps” somewhere in just about every story.
Credit default swaps (CDS) are like an insurance contract on debt where the buyer pays premiums and will receive a lump sum payment if the debtor defaults in some way. It was probably created to be used as a hedge or insurance policy for the entity holding the debt, but in our wacky financial world, there are no regulations in terms of the buyer or seller needing to have any affiliation with the debt itself. As a result, CDS’s have become an investment vehicle deeply based in speculation rather than insuring credit.
Be ready for this guy!
The “gambling” on default has been a touchy subject in the financial world, with some blaming the process as yet another contributor to a negative economy. Others simply consider it just another derivative that will be controlled by demand and proper spreads.
There are plenty of news stories for which to base your own opinion on credit default swaps, so read on and consider yourself mildly ready for that guy you run into tonight with the elbow patches on his sport coat. Impress him by saying “I know Greece is in trouble, but at least the credit default swaps have dropped below 400 thanks to some potentially tougher budget measures.” Maybe that will knock the tobacco from his pipe.
Read on:
KathyLien.com – What are Credit Default Swaps?
BusinessWeek.com – Greek Debt Swaps Fall on Speculation of Tougher Deficit Action
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