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Victoria Mindova

Nikolaos Georgakopoulos is an economic assistant at the Centre for Financial Studies in Athens. He has tried to explain to GRReporter what the insurance on Greek government bonds, known as CDS, are. He has presented his point of view  on what should happen with the Greek foreign debt, stating that the greater the reduction in the face value of debt held by private owners, investment funds and banks, the faster Greece would emerge from the debt crisis. However, Georgakopoulos has not denied that the country needs major structural reforms in order to recover.

What are CDS (Credit Default Swaps) – the Greek government bonds insurances and why is their activation so dangerous for the Greek economy?

The logic of CDS securities is similar to the insurance against fire for a house near the forest. For this reason, many banks and investment firms that had Greek government bonds had also had CDS insurance to hedge or share the risk. If Greece defaults, such insurance will recover a substantial part of the losses due to uncontrolled bankruptcy. Those buying CDS pay a fee each month until the term of the bonds expire.

The contribution was low before the crisis because it was believed that Greece was not threatened with bankruptcy. Subsequently, when the economic crisis deepened, these contributions increased, because the risk of Greece becoming insolvent increased.

The problem comes when investors not holding Greek bonds are buying insurance on them. This process started when Greece showed the first signs of deterioration. Then, the speculation with CDS started. People who had not taken any risk with the Greek government bonds started betting on Greece’s failure because the cost of the insurance they had bought was growing and in the case of the worst development for the country, they would bring a substantial profit.

Do the government bonds in circulation determine the amount of issued CDS securities or are they sold freely according to demand?

CDS issuing is free and according to demand. It is a free investment asset and every one can buy it. Several years ago, its cost and contributions were low. Today, if someone wants to buy such securities they will have to pay large amounts. The price is related to the spread of Greek government bonds. The more expensive the lending to a country becomes, the higher the cost of insurance on its government bonds.

Who issues the CDS securities?

Various investment funds in the USA, Asia and other financial centres around the world. If Greece fails now, it has no obligations to pay the insurance. Institutions that have issued these securities will have to pay the amounts due and they do not like it.

Is this a recent financial tool?

CDS have existed for many years. Many American investors, among them George Soros, had opposed their existence mainly because there is no accurate way to determine their value. The main problem in the capital markets is their lack of transparency. The ratings by credit agencies, which determine the increase or decrease in interest rates on loans and the cost of other financial tools, are subjective. Different credit ratings can be given for the same macroeconomic data of different countries, which raises the question of how much they are real and objective or how much they serve certain interests. It is unclear in the public space how Moody's estimates that Spain's credit rating, for example, must fall by two percentage points.

Do you mean that there is no system that would justify credit ratings?

No, I mean that there is no full transparency on the process.

What does private sector involvement in servicing the debt, known in Greece as PSI +, mean?

Currently, the programme PSI + provides for a reduction of the foreign Greek debt by about € 100 billion. Moreover, another € 30 billion will be granted in guarantees that will cover banks’ recapitalization. The exact amount of the programme is not important. It is more important to see which bonds will be included in this reduction in the face value, at what interest rates the new bonds will replace the old ones and when the replacement will be carried out. Time is going by and dividends are being paid, and the foreign debt should be served until the PSI + negotiations finish. This will establish a controlled bankruptcy, which will have no negative consequences for the country and the European financial system.

It seems that the Greeks in the face of Prime Minister George Papandreou do not want this relief, as he raised the issue of a referendum. Is that right?

Definitely, there is a case when we do not know whether we want their money. If we, the Greeks, who are in this difficult situation, are not sure we want the foreigners’ money, how will our lenders agree to cancel half of our debt.

The truth is that the measures set for implementation until now should be operating now. This has not happened. One reason for this is that Europe’s policy for Greece is quite dogmatic. For the single currency, there are 17 national assemblies, 17 ministries of finance and 17 central banks with a single currency. Thus, processes slow down which negatively affects the capital markets.