Haha, so Greece, right? Bad enough that the country might or might not default, or that certain Wall Street banks (who shall remain anonymous) brokered deals to help the country mask how horribly it was doing; now it’s come to light that those same banks helped set up an index whose sole purpose was to bet on whether Western European countries would fail (spoiler alert: they might!).
Last September, the company, the Markit Group of London, introduced the iTraxx SovX Western Europe index, which is based on such swaps and let traders gamble on Greece shortly before the crisis. Such derivatives have assumed an outsize role in Europe’s debt crisis, as traders focus on their daily gyrations.
A result, some traders say, is a vicious circle. As banks and others rush into these swaps, the cost of insuring Greece’s debt rises. Alarmed by that bearish signal, bond investors then shun Greek bonds, making it harder for the country to borrow. That, in turn, adds to the anxiety — and the whole thing starts over again.
I believe this would be known on urbandictionary as “getting it greek-style.”
On trading desks, there is fierce debate over what exactly is behind Greece’s recent troubles. Some traders say swaps have made the problem worse, while others say Greece’s deteriorating finances are to blame.
This is akin to the argument that guns don’t kill people, people kill people. You know, much like the swaps, the gun doesn’t exactly help matters even if it didn’t cause the problem. Actual smart people agree:
“It’s the blind leading the blind,” said Sylvain R. Raynes, an expert in structured finance at R&R Consulting in New York. “The iTraxx SovX did not create the situation, but it has exacerbated it.”
So there. Whatever the root cause of Greece’s troubles, it’s pretty safe to say that Windex won’t fix it this time. If this news took you by surprise, or if you can’t guess which banks are involved, you must be new here.
Oh, and the whole country keeps going on strike to protest the crisis as well as proposed measures to fix it, so that’s fun.