– The author is a Reuters Breakingviews columnist. The opinions expressed are his own –
By Neil Unmack
LONDON, Feb 17 (Reuters Breakingviews) – Every crisis needs a bogeyman. In a tense euro zone, attention is turning to sovereign credit-default swaps (CDS). Some in the market fear that regulators will now be tempted to ban these derivative instruments — just as the curbs on short-selling financial stocks were introduced following Lehman Brothers’ failure.
It is unclear whether such draconian moves really are in prospect, but wholesale curbs on sovereign CDS should certainly be resisted.
A sovereign CDS is effectively a tradable insurance policy against a country defaulting on its debt. Sky-rocketing sovereign CDS prices — caused by the market’s immaturity — can potentially spook investors in other markets and push up government bond yields, creating a negative feedback loop.
The fear is that this means rampant speculation using CDS can easily and needlessly exacerbate a country’s financing challenges.