The inexorable growth of credit derivatives

Argentina’s debt default in 2001 was traumatic for many, not least for banks, which did little to manage their loan exposures and were badly caught out. Many have learnt their lesson and in turn have helped develop one of the fastest-growing trends in Latin America’s deepening capital markets, the use of credit derivatives. Almost unheard of in the region a decade ago, credit default swaps are becoming a key investment tool as banks move away from plain vanilla lending to better manage their liability exposure and lower their costs, reflecting a growing sophistication in the way they deliver capital.

For investors, the swaps offer increased exposure to Latin American markets. They also give investors a greater range of maturities to play with and enable a broadening of the investor base, even at a time when economic stability means the region’s sovereigns are issuing less and even repurchasing bonds....