Debt crises aren’t uncommon, but Europe’s sovereign debt crisis brings its own unique stamp: a link of network debts.
Rather than one country taking ownership of its crisis such as Argentina (2001) or Mexico (1994), in the current European crisis nations are intertwined thanks to unregulated credit-default swaps. In a recent New York Times illustration, a picture depicts a prominent Greece and Italy with Ireland, Portugal and Spain in the background. France and German and the U.S. are also exposed to the problem.
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The tie that binds them, unregulated credit-default swaps, are esoteric products that trade over the counter (not on an exchange) and they are technically insurance contracts on bonds.
Should they default, the seller of the swap has “promised to pay the buyer the bond’s value.”
Because of the way these countries are connected to the debt crisis through these secret products, they are hardwired to explode. The global financial structure is a ticking debt bomb and if one country blows up, look for chaos seen around the globe.
While risk sharing can be a good thing, is this case, it is not.