The New York Times has now reported on a story we first broke over a week ago: the banks that helped Greece create debt-concealing swaps also took out swap contracts that will pay off if Greece defaults on its debt.
Here’s how Eric Dash and Nelson Schwartz write it up:
Bets by some of the same banks that helped Greece shroud its mounting debts may actually now be pushing the nation closer to the brink of financial ruin.
Echoing the kind of trades that nearly toppled the American International Group, the increasingly popular insurance against the risk of a Greek default is making it harder for Athens to raise the money it needs to pay its bills, according to traders and money managers.
These contracts, known as credit-default swaps, effectively let banks and hedge funds wager on the financial equivalent of a four-alarm fire: a default by a company or, in the case of Greece, an entire country. If Greece reneges on its debts, traders who own these swaps stand to profit.
Unfortunately, there’s a bit of perfectly predictable confusion in the article.
“It’s like buying fire insurance on your neighbour’s house — you create an incentive to burn down the house,” Philip Gisdakis, head of credit strategy at UniCredit in Munich, tells the NYT.
But it’s not really anything like that at all, unless the banks in question are net short Greece. And as far as we can tell, no Wall Street bank is net short Greek debt by any material amount. Instead, many have attempted to hedge their exposures to a sovereign default. So some, like Goldman Sachs, now appear to be “flat” on Greek exposure, standing to neither gain nor lose a large amount regardless of what happens.
The Europeans are certainly not short, according to credit traders familiar with the various positions of major market participants. In fact, most are not even flat. They have massive long exposures that they are desperately attempting to hedge but have been hesitant to sell down their positions for fear of creating a panic sell-off.
“These banks aren’t buying insurance on someone else’s house, they’re buying insurance on their own house,” Felix Salmon points out.
According to the New York Times, French banks hold $75.4 billion worth of Greek debt, Swiss banks have $64 billion of exposure, and German banks’ exposure is $43.2 billion.Of course they are trying to hedge this risk.