Greece: Markets bet on debt default

21st June 2011

The Guardian reported that international markets are now betting that Greece is likely to default on its debt.

The rising cost of buying insurance through so-called credit default swaps –  (CDSs) continued as eurozone finance ministers debated about releasing bailout funds to the indebted country and a warning that Italy's credit rating might be cut.

Credit Default Swaps (CDSs) are an insurance which takes the form of a swap (a derivative). If a borrower is unable to repay a loan they will default, but if a lender has purchased a CDS on that loan from an insurance company, they can then use the default as a credit to swap it in exchange for a repayment from an insurance company – which has essentially bought the debt.

Speculators can also purchase a CDS. If a borrower does not repay his loan on time and defaults not only does the lender get paid by the insurance company, but the speculator gets paid as well.

Gavan Nolan, credit analyst at Markit, told the Guardian that to insure €10m (£8.8m) of Greek debt would cost €2m every year for five years. No other country is as expensive to insure. Venezuela is the next most expensive, but even then is almost half the cost.

More on the Greek debt crisis here:

Opinion: Shaun Richards give the latest take on events on his Mindful Money blog.

News: Greece prepares new cabinet

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