In the Greek crisis, credit default swaps were the lion that didn’t roar. One of the supposed obstacles to solving the Greek crisis was the potential exposure of banks to credit default swaps. Earlier attempts at a deal had gone out of their way to avoid a ‘credit event’ and trigger payment on these. Yet when the deal was struck last week and the truth of a Greek default was finally acknowledged nothing happened. Why not?
There are two possibilities. One is it was so clear that Greece would eventually default that the banks with exposure had either already provisioned for it, hedged it out somehow or let it expire. The second is that it was never that bad in the first place. And it seems to me that noone knows what the answer really is.
But somebody should. National policy was subverted to the possible danger of bankrupting banks, but we don’t know the truth of this. The lack of transparency in derivative markets remains a blight on both their efficient operation and public policy. Cast some light on this shadow and let all see what’s there, even if it means less profit for the banks.