Avoiding triggering Greek sovereign CDS is a mistake – but was it? We really do not know the impact of triggering CDS insurance in the current market. Neutralising the swaps would limit the “expected” fall out on Greek debt to a narrower set of more “certain” parameters, if you can presently define anything with certainty. Perhaps there were a number of key institutions that would have been impacted if CDSs had been triggered. What we do not know is the impact of the neutralisation of CDSs on other Euro debt, and yes, this might cause some to sell into the market, raising yield spreads, if they cannot count on CDS protection. But if the other sovereigns are going to be exposed to a default somewhere down the road, this may also have reduced the uncertain risk of Credit Default Swaps on the financial system.
Europe’s grand gamble risks failure without ECB: a 50% haircut for Greece and a mere 20% for other teetering sovereigns with the EFSF, as Ambrose Evans-Pritchard suggests, risks opening up a whole new set of problems.