Are Sovereign CDS Evil?

Following on from Jim’s Sovereign CDS Q&A blog (see here) I came across this chart at zerohedge.com.  Whilst I can’t vouch for its accuracy, the chart shows that the actual net amount of outstanding sovereign CDS contracts, relative to outstanding government debts, are actually very small. That would seem to add weight to Jim’s argument that the  pressures faced by governments are borne ‘of fiscal imprudence and a lack of will to resolve this,’ rather than the sole work of evil speculators.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Discuss Article

  1. Ted K says:

    So, what you're saying is, we shouldn't be angry at Goldman Sachs for walking up to the fat guy and offering him a box of 10 cherry pies??? Isn't it just the least bit interesting to you traders who run to the defence of each others' (other traders and dealers) gradual moral decrepitude that this was the same exact firm that blew up AIG???

    Posted on: 27/02/10 | 12:00 am
  2. Anonymous says:

    I believe there is a little flaw in this argument. If you look at 'net' outstanding amount without any information of the underlying numbers, you can only deduct whether the market is a relative buyer or a seller of CDS. But what about the underlying 'gross' positions? They might be two times larger than the outstanding debt (a lot of liquidity) or two times less (less liquidity). Furthermore, a lot of CDS strategies involve net positions, i.e. buying and selling a 1YR CDS, although they might in fact be speculative positions.

    Posted on: 01/03/10 | 12:00 am

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