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Wednesday, January 4, 2012

The Return of The Credit Default Swaps

Credit Default Swaps were central to the lamentations of many investors, investment bankers, political experts, and others during the United States financial meltdown in 2008. It is now 2012, and these products rise again out of the ashes, but now they are in Europe. Europe is dealing with the crisis of the Euro currency and Greek financial debacle, but throw in for good measure the issue surrounding the Credit Default Swaps. The combination of these three issues have a potential of creating a toxic confluence for the perfect financial storm. If the European banks are attempting to "bail out" Greece what happens if there is a market crash that relates to Credit default swaps? How will this impact Italy? Side Note: Italy has a large exposure to debt securities from various Euro Governments. They are seeking to raise more capital to cover their potential losses as discussed here in this article.  If these things happen, investors will seek to make claims on the CDS for institutions that are holding toxic assets. If there is a major "run" on these financial entities issuing these swaps, what methods will be used to bail them out?  For the folks in the US, there should be concerns regarding the risk exposure to this potential meltdown. In this article, it discusses the details of how this along with other issues make it a challenge for Euro central planners. Concomitantly as it relates to the Euro and other monetary issues, Gold prices continue to reach for record highs.

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