Management of Greek Sovereign Risk

In 2010, excessive public spending produced the first sovereign bond market crisis in Europe: Greece. The Hellenic crisis is the product of years of recession, sluggish economic environment and poor productivity, and above all, it is the product of the mismanagement of public finances, and unsatisfactory reporting, risk management and accounting practices. Information about Greece is scarce and fragmented, but the inability of the European authorities to understand the incredible mismanagement strongly disappoints the taxpayer. The relevant exposure of European banks in the bond market toward the default risk of Greece supports the need for hedging tools such as Credit Default Swap (CDS). However, there is evidence that the CDS market on Greek sovereign bonds is segmented, and the contracts are mis-priced. The lack of comprehensive data on CDS and other Over-the-Counter (OTC) contracts impedes any further investigation. European authorities should consider revising CDS's trading rules and requirements, until the risks produced are properly limited