Greek haircut decision casts doubt on future of CDS

The 50% haircut on Greek debt agreed at the EU summit last week has called into question the future of credit default swaps (CDS)as a hedging tool for bondholders.

The EU said the haircut is voluntary, meaning it will not be classed as a sovereign default, so holders of CDS – which are meant to insure against such an event – may not receive payouts. At $3.7bn, the net notional value of CDS on Greek government debt is relatively small, but policymakers have been anxious to avoid triggering a credit event for fear of contagion elsewhere in Europe. “The question is, how does the CDS market react to this? If the authorities do not make it a default event then sovereign CDS becomes irrelevant. What is the purpose of people hedging if those hedges do ...