Credit Default Swaps Strike Again – This Time Driving Greece to the Brink of Default
Credit default swaps (CDS) gained infamy in the early stages of the financial crisis as the murky derivatives that helped drive the likes of Lehman Bros and Bear Stearns into bankruptcy.
Now, they're back, inspiring panic in the bond market and making it harder for Greece to borrow money. Already struggling to rein in its out-of-control deficit, credit default swaps could be enough to push the debt-ridden nation into default.
Credit default swaps are credit derivative contracts that let banks and hedge funds place bets on whether or not a company, or in this case a country, will default. The CDS buyer makes periodic payments to the seller, and in return receives a payoff if the underlying financial instrument defaults.