Congressional Hearings: Credit Default Swaps Not Responsible for Greek Collapse

Watching Greece collapse under its own socialist weight has led many on the left to avert their gaze and instead scream "Bankster" and claim the financial houses alone caused the collapse because of some of the deals Greece was connected to. This is nonsense, the overload of debt has driven the nation to the brink and only the fear that the disaster might spread has led to rescue attempts, the latest of which appears to have worked, for the week at least. Today Congress received testimony explaining how in fact the derivatives may have helped Greece rather then hurt:

WASHINGTON, April 29 (Reuters) - Credit default swaps did not cause or worsen Greece's debt woes, but actually helped markets realize the depth of its crisis, derivatives experts told U.S. lawmakers on Thursday.

Greece's debt problems, which have pushed it to request a bailout from the International Monetary Fund and the European Union, were of its own making, caused by Greece borrowing more than it could repay, the academics and industry experts said in testimony to the U.S. House of Representatives Financial Services subcommittee on capital markets.

"Credit default swaps (CDS) are the current "villain du jour" in the Greek debt fiasco," said Anthony Sanders, a finance professor at George Mason University in Fairfax, Virginia. "The Greek crisis is the result of massive government spending and debt issuance to fund the spending. In fact, CDSs on Greek sovereign debt actually served a positive role: it alerted everyone around the globe that Greece was in a credit death spiral."

Democratic lawmakers examined the issue as a way to further their case for tougher U.S. regulation of the derivatives markets and of credit ratings agencies. Some have criticized so-called naked credit default swaps, in which no underlying asset is hedged, for worsening the financial crisis by leading to a build-up of risks.

The argument on behalf of CDS contracts is that they help reduce the interest government would have to pay since they insure against default, the recent reports out of California attest that might be the case, more to the point the impact on Greece was negligible:

Pickel said it was unlikely that CDS trading volumes could have a significant impact on a country's overall debt spreads, and sovereign CDS also may moderate some downward pressure on troubled countries. If sovereign CDS were banned, investors would simply dump or short-sell a country's bonds directly, he said.

Darrell Duffie, finance professor at Stanford University's Graduate School of Business, said research he conducted with Boston College professor Zhipeng Zhang found no statistical correlation between amounts of credit default swaps on debt issued by Greece and California and their borrowing costs.

What has caused Greek borrowing costs to rise is the revelation of information that has decreased the probability that investors will not be repaid, he said, adding, "It's quite hard to imagine how speculation by credit default swap investors has caused Greece to borrow more than it can pay back," Duffie said.

Now Robert Pickel, is the executive vice chairman of the International Swaps and Derivatives Association so he is hardly an unbiased source, and like most things in these crazy deals take it as you will. Anyway I don't see what the big deal is, the derivative market is only 448.7 TRILLION dollars.