Credit default swap interrelationships (CDS interrelation)

At the end of 2011, banks in the EMU had issued credit default swap insurance worth EUR 178 billion on government bonds issued by the five weak EMU members Portugal, Italy, Ireland, Greece and Spain. The individual institutions, however, protected themselves against these risks by purchasing credit default swaps worth EUR 169 billion, mostly from other banks in the EMU. As a result, a hardly transparent network of claims and counterclaims was created, which obscures the actual risk position of the individual institutions. – The European Banking Authority identified EUR 37.4 billion in CDSs sold at Deutsche Bank and EUR 34.5 billion in credit default swaps purchased; at Landesbank BadenWürttemberg, EUR 5.4 billion was offset by EUR 4.1 billion. However, the EBA’s figures do not provide any information on which banks have entered into commitments with each other. If initially only Greek government bonds were to default, this would trigger a chain reaction with unforeseeable consequences for financial stability in the EMU. This fear was seen as one of the reasons why all European institutions, including the ECB, did everything possible to prevent a sovereign default in Greece. – See European Stabilization Mechanism, ECB Sin.

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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
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