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You have far too much faith in the credit default swap market. The CDS market is just as broken as the rating agencies.

But anyway, you're asking the tail to wag the dog. If both the credit rating system and the credit default swap market functioned as advertised, the credit default swap market should be following the credit ratings, not the other way around.

Another point here is that even if both the rating agencies and the CDS markets functioned as advertised, the participants may well have differing political analyses. If the ratings agencies believe that the Greek sovereign debt is covered by an implicit guarantee from Germany, this will be reflected in the ratings. If the price-setting players on the CDS market do not believe this, then their bid and ask prices will reflect their different assumptions about the probability of a bailout.

Of course, this entire discussion is somewhat akin to arguing about the number of angels than can fit on a pinhead, since both the credit rating agencies and the credit default swap markets are obviously broken and being gamed rather blatantly.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Apr 26th, 2010 at 07:39:31 PM EST
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