Friday, November 18, 2011

Commerzbank chief attacks Greek deal

Financial Times
November 18, 2011

The market for credit default swaps on sovereign bonds should be “closed down” if investors cannot be guaranteed the pay-outs they are entitled to in the case of a default, says the chief executive of Commerzbank.

The comments from Martin Blessing reflect growing unease at the repercussions for sovereign debt markets after EU leaders engineered a voluntary agreement allowing a partial Greek debt default without triggering CDS payments. CDS contracts are a form of insurance that offer the buyer protection against a default on a security.

“Government bonds cannot be effectively insured against default,” said Mr Blessing. His bank is Germany’s second largest by assets and one of the banks most heavily invested in sovereign debt from so-called peripheral eurozone states.

Mr Blessing criticised the Greek agreement since investors that insured Greek bonds using CDS had not received a pay-out because the voluntary agreement was not deemed to be a so-called “credit event” and thus did not trigger CDS payments.

“If there is to be a market for CDS [that] is unable to pay if a credit event is triggered, then this market should immediately be closed down by regulators. And one should not attempt to rescue it by means of a market intervention at the expense of the insurance,” he told an audience of bankers and regulators at the European Banking Congress in Frankfurt.

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