The debt ceiling, and cavalier chatter of missing an interest payment or two, has put a bid into US sovereign CDS. This is a small market compared to notional amounts in other countries. The question is would a delay in payment trigger a CDS event? If not, why purchase the insurance? And this brings us to the conundrum in the EU.
The net exposure in Greek CDS is roughly 6 billion, or so. The Credit Default Swap is a derivative that looks like insurance against non-payment. However, the Eu situation is stagnating on negotiations of how to restructure/re-profile/reschedule/default and not trigger the CDS. What is the point of purchasing it then? Would another 6 billion euros of exposure crack the system? I've got news for you, its already cracked. Who wrote the CDS that now has the bureaucracy in AIG-like cold sweats? Everyone knows the situation cannot continue in present form. We are just waiting for the lawyers to decide how a credit event can occur without triggering the insurance bought to protect against that event. Now, that will make you trigger happy.
In addition: Ytesterday, the NY Fed announced the GSEs as RRP counter-parties in the Chupacabra of exit strategies (discussed and heard of but never seen). This will be an important addition to holding the relationship between IOER and FF relevant on the way up. The Home Loan banks had to make advances in the billions during the crisis; we believe they will be the active GSE participant should a Chupacabra sighting ever take place.