Finance Watch release position paper on sovereign CDS

Private interests have a legitimate and useful role to play in society as long as they are pursued openly and honestly. Finance Watch believes that when a private interest is dressed in public interest clothes it distorts the debate, hence the “Private interest dressed in public interest clothes” series we are starting today.

This first paper deals with sovereign credit default swaps.

Executive summary:

Simple logic as well as statistical evidence show that so-called naked use of sovereign credit default swaps cannot contribute to lowering the cost of borrowing of sovereign issuers.

Moreover, even though sovereign credit default swaps are not the cause of debt crises, they contribute to making already difficult credit situations degenerate as they create a mechanical “acceleration effect” on the way down.

Everything else being equal, sovereign credit default swaps amplify sovereign credit crisis situations and make finding a solution to those situations more difficult than it would be without them.

Download the paper, dated 11 July 2011, here: Why sovereign CDS do not lower sovereign funding costs