There’s a small irony that might be lost on western governments. As they prepare legislation to clamp down on the credit default swap market, which, they claim, creates systemic risk, the very same instrument is becoming the tool of choice in hedging the ultimate of all systemic risks, sovereign default.
Since October, the net amount of credit default swaps outstanding on 54 governments from Japan to Greece has jumped 14%, compared with just 2.6% for all other contracts, consisting of investment-grade and high-yield companies, according to the Depository Trust & Clearing Corporation.
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