Don't mess with my CDS

11 May 2011 By Neil Unmack Follow @unmack1

Market fears that EU politicians are conniving to prevent a payout on Greek credit default swaps if it restructures smack of paranoia. But this is a possibility. A restructuring without a payout could be a pain for derivative supporters, but it wouldn’t kill sovereign CDS.

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The spread on Greek credit default swaps was 1,268 basis points on May. 11, up from 999 basis points at the start of the year. That means it costs $1.268 million to insure $10 million of debt against default.

Sovereign credit default swaps can be triggered if a county fails to pay, repudiates or restructures its debt. A restructuring credit event means a reduction in principal or interest, a change in currency or subordination of a country's debt or debt extension, in a way that binds all creditors of a given obligation.

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