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

April 2013

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

  • International Monetary Fund

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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