European bailout

The Greek government along with other governments purchased mortgage bundles(collateralized debt obligations CDO’s) from the US because they liked the high interest rate these bundles were paying. They got the money to buys these by selling Greek government bonds. At the same time they also purchased insurance against default called credit-default swaps(CDS’s). Now the big question is since the insurance protects against the mortgage bundles does it also protect the bonds. This is very important to the US banks since they sold about $500 billion in CDS’s to the European investors. ISDA(International Swaps and Derivatives Association) has made the right decision: the Greek bond default does not and should not count as a “credit event” for the purposes of whether Greek credit default swaps will get triggered. In other words if the insurance is only for the mortgage bundles and not for the bonds that provided the money to buy the bundles, the insurance will not have to pay.