Betting on Default

In  all the media coverage of the dual crises the whole theme seems to be a 'political crisis' and the response of the markets.  Not much mention even of government bonds.

Yet, as this article makes it clear there is a another, huge factor in all this - the derivatives market which is greater than the combined world GDP - specifically credit fault swaps (CDS), widely used in the lead-up to the 2008 crash, and now taken up against countries like Greece, and now Italy.


An article in May said that CDS against the United States had doubled

Credit default swaps are basically bets that an economy (or company) is going to fail.

So it must be a strong indicator of investor perceptions of where things are going.

Investors Lose Faith in Italy

der Spiegel, Sunday, August 7, 2011

A recent surge in the purchase of credit default swaps shows that an increasing number of investors believe Italy is in trouble. Some experts doubt the CDS providers would be capable of paying out if Rome were to default.

Yields on Italian government bonds, it seems, aren't the only things rising in the country this summer as investors begin to ask if Italy will be the next domino to fall in Europe. Currently, more bets on credit defaults -- so-called credit default swaps (CDS) -- are being taken out on Italy than any other country.

With a gross CDS volume of almost $306 billion (€212.69 billion), the country is currently in the lead, ahead of Brazil ($179 billion) and Spain ($176 billion). Indeed, the desire among investors to bet on a default in Italy and Spain appears to be growing. Since mid-June, the bets against Italy have risen by $23 billion and those against Spain by $18 billion.

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