Shutterstock photo
Markets

Is France next? Credit swaps say “maybe” (BNPQY, UNCFF)

Shutterstock photo

Shutterstock photo

BNP Paribas ( BNPQY , quote ), the biggest bank in France, just sold $2 billion in credit default swaps to insure its holdings in the country's sovereign debt. UniCredit SPA ( UNCFF , quote ), the largest financial insitution in Italy, also has significant exposure to sovereign debt credit default swaps, which pay off the holder in exchange for the underlying securities or the cash equivalent should there be a default by the borrower.

Dagong, a Chinese credit rating agency, recently downgraded French sovereign debt. "We believe that the economic slowdown is worse than expected and the economy will remain sluggish over the medium term," Dagong said in a statement.

Dagong is considered to have little influence outside of China, stated one news report.

In the Bloomberg News piece, "BNP Paribas Sold $2 billion French Swap, EB says," by Abigail Moses,

it was reported that "Some of this is trading rather than pure hedging," said Gary Jenkins, head of fixed income at Evolution Securities Ltd. in London.

"If European counties the size of France or Italy actually defaulted and triggered CDS, there would be total carnage and meltdown. It would be the end of the world, and at that stage it's likely your counterparty would be the least of your worries."

The Bloomberg News report by Moses states European leaders blaming credit default swaps for exacerbating the crisis.

Even if Dagong has little influence outside of China and speculators are making matters worse, there is support behind the positions.

Even more troubling for the euro zone is that even if Dagong only has influence inside China, that is where the largest cache of foreign reserves in the world is parked. These funds will be needed,in some capacity, to finance a rescue package for Europe.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics

Stocks

Latest Markets Videos