A credit event is a 50 cent way of saying ‘default’.
The way a Credit Default Swap (CDS) works is that a lender asks the debter to buy insurance to make him/her whole should they default on the loan.
That CDS traditionally was held by the lender, and was worthless if the debt was paid back. The insurer (AIG was a BIG writer of such insurance policies) would make money on the premiums collected on those policies.
If the debtor defaults on the loan, the insurer (AIG) would pay you the face value of the loan, and then would be the new holder of that loan (that’s the swap part).
What happened in Greece was a declaration that Greece has formally defaulted on their sovereign bond debt. Individuals made Greece a loan, and Greece can’t pay it back. That means that the writers of the CDS’s insuring those bonds against default now have to pay the face value of those bonds.
HOWEVER, what is unclear to me in all of this is whether there was some deal that was put in place to protect the AIG’s and others in the world dumb enough to insure those bonds.
Keep in mind, that Italy, Spain, and Portugal are sitting there with far more bond debt. Portugal is said to be the next pony off the cliff, since the confidence that some accommodation could be made to save BOTH Greece AND the Euro was not successfully accomplished.
Also unclear is whether Greece will be forced to reissure Drachmas for Euros, etc.
This is giant. They just declared Greece fiscally dead, for all intents and purposes.
Thanks.
I don't know why there hasn't been a bigger reaction if it's so big, eh?
Thanks.
Who has that kind of money to insure the debt of Greece?