Tradable CDS Index On European Governments To Become Available

In what is turning out to be more than just a little bit of irony, sovereign credit default swaps may end up being more widely traded when a new basket of 15 countries is launched later this year through the Markit iTraxx SovX Western Europe Index (see WSJ article). It is widely believe by many that the corporate CDS market was to blame in part for the recent financial crisis.

To help clean up the mess and unfreeze the credit markets, many European and world governments have been borrowing massive amounts of money and injecting it into their economic systems in order to add liquidity.

Unfortunately, the massive spending and borrowing are putting the credit quality of many these same countries into jeopardy, producing an unusual turn of events as CDS contracts are now being used to protect against default in those very countries which had too many companies with dangerous levels of CDS exposure.

Now, not only can you trade CDS contracts to protect yourself against a country defaulting, but soon you will be able to trade a more diversified basket of sovereign CDS contracts. Profitable? Maybe. Maybe not. Of course, if there is another massive default, I am not sure who will be left to bail out this market if spending continues at current levels.

There is only so long you can solve a problem caused by too much debt by taking out additional debt. But, look on the bright side. At least now you can trade it, for a while. I guess financial innovation never sleeps.

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