A New Look at the Role of Sovereign Credit Default Swaps (International Monetary Fund)

April 2013

KEYWORDS: Austria, bid-ask spread, Brazil, CDS, credit default swaps, credit risk, European Banking Authority, financial institutions, France, Greece, IMF, International Monetary Fund, Ireland, Italy, Japan, Liquidity, Mexico, OTC derivatives, Portugal, Russia, SCDS, sovereign CDS, sovereign credit default swaps, Spain, Turkey, United Kingdom, United States, Volatility

Authors:
Organizations:
  • International Monetary Fund

Summary:
The debate about the usefulness of sovereign credit default swaps (SCDS) intensified with the out-break of sovereign debt stress in the euro area. SCDS can be used to protect investors against losses on sovereign debt arising from so-called credit events such as default or debt restructuring. SCDS have become important tools in the management of credit risk, and the premiums paid for the protection off ered by SCDS are commonly used as market indicators of credit risk. Although CDS that reference sovereign credits are only a small part of the sovereign debt market ($3 trillion notional SCDS outstanding at end-June 2012, compared with $50 trillion of total government debt outstanding at end-2011), their importance has been growing rapidly since 2008, especially in advanced economies.

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