Financial Destabilization, Credit Default Swaps (CDS) and the Rating Agencies

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In July-September 2011 the stock markets were again shaken at international level. The crisis has become deeper in the EU, particularly with respect to debts. The CADTM interviewed Eric Toussaint about various facets of this new stage in the crisis.

CADTM: You haven’t talked about Credit Default Swaps (CDSs) yet.

Eric Toussaint: CDSs are a derivative financial product which is not submitted to any form of public control. They were created in the first half of the 1990s in the middle of the era of deregulation. Credit Default Swap literally means permutation of unpaid debts. Normally, it should allow the holder of a loan to obtain compensation from the CDS seller in the case of default by the bond-issuer, whether a government or a private company. I use the conditional for two main reasons. Firstly, a CDS can be bought as protection against the risk of non repayment of a bond that the buyer does not have. This is the same as taking out insurance for the house next door, hoping that it will catch fire so that one can get the money. Secondly, CDS sellers do not begin by banking enough funds to indemnify victims of defaults. If a whole lot of private companies having issued bonds should go bankrupt, or if a major lender State should default on payments, it is quite certain that CDS sellers would be incapable of indemnifying as promised. In 2008, the collapse of the North-American company AIG, the biggest international insurance company (which was actually nationalized by Bush to avoid the consequences of bankruptcy) and that of Lehman Brothers were directly linked to the CDS market. AIG and Lehman had both been very active in this sector.

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About Giorgio Bertini

Director at Learning Change Project - Research on society, culture, art, neuroscience, cognition, critical thinking, intelligence, creativity, autopoiesis, self-organization, rhizomes, complexity, systems, networks, leadership, sustainability, thinkers, futures ++
This entry was posted in Crisis, Derivatives, Financial system, Ratings agencies and tagged , , , . Bookmark the permalink.

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