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They're not reliable anymore.

This market is broken, with only near-bankrupt firms selling protection (backed by over-collateralization from their remaining assets, performing or not), to other near-bankrupt firms seeking regulatory arbitrage (protect your risk-weighted assets from a downgrade of your asset, by having it protected by someone who, you hope, will be downgraded only somewhat later).

But still, distressed banks including my own have spreads, for what they're worth, of a few % of protected amount. This spread is a fee that the buyer of protection has to pay each year. Hence a "market" price of 10 B€/year. Over 5% of Irish GDP, which is now closer to 200 B€ actually according to Wikipedia.

Pierre

by Pierre on Wed Oct 1st, 2008 at 12:10:16 PM EST
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