Lara Cathcart, senior lecturer at Imperial College, presented evidence that trading activity alone did not have a meaningful impact on sovereign default risk, as it does not cause the cost of borrowing for countries to increase. The increase in CDS spreads during the crisis was mainly due to a surge in liquidity rather than an increase in default risk, she said.
Paul Crean, co-founder and CIO of emerging market fixed income specialist Finisterre Capital, pointed out that investors often used CDS as liquid tools to hedge their underlying exposures against spread widening, not necessarily out of concerns for a possible default. Crean cited evidence that the nominal volume of CDS positions alone was not big enough to have a meaningful impact on countries' bond markets. He added that banning naked CDS would cause liquidity deterioration for investors trying to hedge their exposures and, as a likely effect, force borrowers into shortening the maturity of their debt.
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