Greek Gyrations

The lead article in today’s New York Times is titled, “Banks Bet Greece Defaults on Debt They Helped Hide.” It compares a new dynamic regarding the possible default of Greece on its debt to the system that drove Lehman Brothers into bankruptcy.

Apparently, there’s a new demand for credit-default swaps regarding Greece as a way for hedge funds and other investors to protect themselves in case the country is unable to meet its obligations. These financial instruments, in turn, make it harder for Greece to borrow money and raise the cost of insurance for its bonds.

The article compares the situation to “the tail wagging the dog,” and traces the development to one company, the Markit Group of London, who created the iTraxx SovX Western Europe index. This index enables credit-default swaps on the solvency of Greece. Previously, there was no demand for such hedging as the possibility of a national bankruptcy in an established nation state was thought to be very remote. Now, however, as more and more traders are starting to bet against Greece, it makes it harder and harder for the country to issue new bonds to cover their existing debt.

This situation is untenable. The article compares it to betting on a four-alarm fire at your neighbor’s home and illustrates the need for financial regulation more than ever. The players, the banks, are not to blame because they are just maximizing their position within the existing system. It is the responsibility of regulatory institutions to step up and establish ground rules to bring some order and responsibility into this chaos. How long will it take for a responsible organization to act?