Credit Default Swaps - the data

While I'm fighting with the people at the Guardian to recover the 26 comments that they removed from the Comment is Free site, the fact is that the world of finance is continuing its deregulated course.

I'm very concerned about the number of Credit Default Swaps that have been taken out. These are these insane insurance policies that the markets can take out and claim in the event of a defaul. The insane aspect is that you don't need to lend to the Greeks to be able to take out insurance on a Greek default. It's like having hundreds of different people taking out fire insurance on my house and then discovering that, surprise, surprise, my house accidentally catches fire. 

I was listening to BBC Radio 4 last week, and realized that there was a great deal of confusion. One "expert" on the financial section of the Today program was saying that there was no major problem because the total payout in the event of a Greek default would only be a few billion. But a few days later on File on Four (Cash from Crisis), we were told that the UK financial sector could be very seriously hit because they had become heavilly involved in selling Credit Default Swaps. So, what is the truth?

I'm not sure I know, but I have just discovered the DTCC  (Depository Trust and Clearing Corporation) that has a website where you can download massive data sets about the extent of CDS contracts. I got the latest data set (14th October 2011) and generated the following data set from their table 2.

The numbers seem totally mind blowing. The total amount of CDS assurance would appear to have a total value of 15.4 trillion dollars - about one fifth of the entire world's GDP. And the amount taken out on Sovereign/State Bodies is currently 2.8 trillion dollars. By looking at table 6 of the DTCC data, you can find that CDSs on Sovereign debt are highest for Italy ($307 billion), followed by Brazil ($184 billion) and Spain ($162 billion). France comes in at a respectable 6th position with nearly $128 billion, and Greece is 9th with nearly $75 billion.  I'm not completely sure, but I'm assuming that this means that if Greece defaults (which they will do if the Greek people gets to vote on it), someone will have to find $75 billion to pay out the money on the insurance policies. My bet is that the banks will say that they will need yet another huge bailout to prevent the world economy collapsing.

Surely, this is complete madness. One of the first things that should be done at the G20 meeting in two days time should be to impose a complete ban on these insurance policies that you take out even if you have not taken any risk and which have the effect that there are many in the financial world who be licking their lips at the prospect of a Greek default.

Apart from anything else, if the massive sums invested in this madness were put back into the real economy, this would no doubt produce a massive boost to growth.