Felix Salmon

Greece reaps the benefit of its CDS market

By Felix Salmon
March 4, 2010

Great news from Greece: its brand-new €5 billion, 10-year bond issue was three times oversubscribed and is already rising in the secondary market, after pricing at a spread of 300bp over the mid-swap rate. Greece is paying a 6.4% yield on the issue, which is pretty affordable in the grand scheme of things, given how much trouble it’s in right now. And now that this bond has gone so well, there will surely be appetite in the market for more where that came from.

One of the big problems with debt markets is that, especially during times of stress, they become very illiquid. Many bankers have spent many hours trying to explain to emerging-market finance ministers that just because their bonds are trading at a certain level in the secondary market, that doesn’t mean they can issue new bonds at that level, or even at all.

But it turns out that a liquid CDS market is a great way of enabling countries to access the primary markets even when the secondary markets are full of uncertainty and turmoil. Which is yet another reason to laud the notorious buyers of naked CDS protection, rather than demonizing them.

7 comments so far | RSS Comments RSS

I don’t see much evidence that the existence of the CDS market adversely affected the Greek debt market. But I also don’t see where there is evidence that the CDS market helped the Greek debt market. What leads you to believe that in the absence of CDS on the Hellenic Republic, Greece would have had to issue debt at a higher yield? Do you have any evidence aside from historical examples of countries that were not members of a monetary union issuing one of the world’s reserve currencies?

Posted by csissoko | Report as abusive

What a crock! Saying we should be grateful for all the naked CDS on a Greek default is like saying we should be thankful that AIG provided the swaps which kept the market for subprime MBS liquid. I just wish the guy who wrote this piece had to pay out on the billions in unsecured swaps which will come due when Greece does default. For sure whoever wrote them won’t have the cash. And next time the Fed won’t be there to bail out Goldman and the other suckers that wrote CDS on a Greek default, because the Fed won’t be able to borrow either after the market-wide sovereign meltdown. Writing CDS allows banks to effectively print money by taking on liabilities which aren’t backed by assets, collateral, or cash. They have written hundreds of trillions of CDS on a 60 trillion dollar economy.

Posted by reconstructions | Report as abusive

I’m a bit puzzled why this bond issue was made available because of the CDS market. Are you saying buyers of these bonds would also buy CDS on them? Why would they do that – why wouldn’t they simply demand a higher yield on the bond first?

Posted by mjturner | Report as abusive

It’s not the buyers of CDS should be “notorious” it’s the sellers.

Posted by carpingdemon | Report as abusive

“Another reason to laud the notorious buyers of naked CDS protection”?
Who is paying you to defend in such a way and without evidence (correlations, causation, etc.) CDS? Do you have any undisclosed position?
It’s a common belief to qualify the credit default swap(CDS) market as very liquid. Can you provide some support for this view?

Posted by M.G.inProgress | Report as abusive

Okay, I can accept the CDS market is not pure evil, but I think all this push to convince us the CDS market is doing God’s work is a bit much. Now I see FT’s hedge fund guy is pushing the same line, that the hedge fund meeting in Greece was all about helping Greece. I guess I’m a crusty old cynic but I smell a pr campaign. Of course, when you guys lay it on this thick….

Posted by wpw | Report as abusive

“It turns out” that “it turns out” is not a valid way to get from a bunch of sketchily supported premises to a barely-related and probably-false conclusion. The ability of Greece to access the credit markets depends on the appetite of buyers for Greek credit risk. Thanks to the wonders of moral hazard and the continued willingness of governments to stiff taxpayers in order to bail out bondholders, buyers are hungry for Greek credit risk, since it appears to be German credit risk + 300 bp. Bill Gross did really well with this trade in the U.S. – FNM, FRE, C, and BAC debt all became almost equal to Treasuries. This trade is a redistribution of wealth from taxpayers and prudent investors to those who speculate on bailouts. Of course, if no one bails out Greece the speculators will eat it big-time, but rather than a working out of market forces we now have a guessing game of whether governments will take losses away from moral hazard investors and give them to the more prudent. I don’t know what this has to do with the CDS market, which only moves around existing credit risk.

Posted by najdorf | Report as abusive

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