Sovereign Debt and Recovery Locks

FT Alphaville has an interesting article on this type of product: you can read it here.

10 replies on “Sovereign Debt and Recovery Locks”

Oh god! Not more excel sheet snake oil from market traders and their ex-theoretical physics quants. This is another obfuscated CDS scheme to insure against default, but which will only end up sinking another insurer, and probably everyone else too.

I rather default than play poker with this lot again. Fool me once shame on you. Fool me, fool me twice…. Y’aint gonna fool me again!



Excellent link Philip, thanks again.

I figured out, I think, how all that works and it appears we are a better risk than the others – not bad going.

On a line to other posts is it because

1. As Garret Fitzgerald believes the market knows little about what is actually happening here.

2. They couldn’t believe the guanantee the Gov. gave the banks and some think we are so browbeaten with ECB/ESRF and IMF that we dare not default.

3. The fundementals of the Irish economy are so good that we can actually get ourselves out of this hole without default.

4. Are they all, as OMF states above.

I’d be interested in anyones thoughts.

Or have I totally missed the point. 🙂

Relating to above. I am specifically refering to fig. 62. on the insurance risk of Irish default (I think).

Sorry 🙂

Those recovery rates would imply default probabilities of over 75% over the next 10 years.

Is this not just adding adding a further layer of financialisation when it was these layers of financialisation with all the fancy products developed by the quants, huge under-pricing (and misunderstanding) of risk and lack of transparency that caused this global mess initially. The key problem, which nobody seems to be addressing, is that these layers of financialisation are totally distorting the underlying markets. The problems of the periphery are bad enough, but they’re still just ‘bog standard’ fiscal/bank blowouts. Why make them more complex than they are and risk further FUs.


“Why make them more complex than they are and risk further FUs.”

It is perceived as product innovation. Not much volume, yet.


I’m no luddite, but, given what we’re going through – and the extent to which paper markets are distorting underlying physical markets in other sectors, I’m just worried about regulatory capabiity to keep tabs on this kind of stuff.

@Paul Hunt

Its just a way for guys to get paid lby drippy execs for effectively betting on two flies crawling up a wall. It is economically and socially worse than useless.

But if they make the product available, the liquidity will seek it out.

@ Dreaded_Estate

Thanks for the clarification – not looking good then?


@ paul

I agree totally with you in regards to Regulation.

I think a lot of people don’t realise about the financial products market is that there are people developing these things all the time.

Drinks manufacturers, Drugs manufacturers, Finance manufacturers all have engineers and developers thinking new stuff up to give you what you want, or more importantly what they have made you believe you want.

Regulators should be as innovative in its regulation as the market it regulates.

This is typical closed environment stuff and an explanation of why the international financial system is in such a fragile state.

The sub-text, of course, is to create the impression of a likely full sovereign default in the euroarea. But how likely is this?

The three problem children represent about 8% of the economic weight of the euroarea. The tail may occasionally be taken to wag the dog but not when it comes to financial matters.

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