The credit default swap (CDS) market may face a threat in the future if derivative instruments do not pay out after the current week’s rescue deal for Greece, Reuters reports. The implosion of the sovereign CDS market, which helps hedge against the risk of a country defaulting, may deter investors from buying government bonds.
Investors may cut purchases out of a sense of vulnerability and fear of higher risk, increasing borrowing costs for governments especially in the euro zone. Private sector creditors, including insurers, banks and funds, will bear losses of €100 billion on their Greek debt holdings as per a new bailout agreement signed last week.
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