Some investors entered swaps on Greece as a way of effectively insuring themselves against losses on their Greek bonds, while others used them as a way to bet on a default happening.
"I don't see a U.S. default, or a partial default happening," said Jörg Asmussen, a European Central Bank board member, according to Reuters.
"People believe there is a low chance the default happens," Mr. Takata said in Tokyo.
The default happened after a last-gasp refinancing plan fell at the final hurdle, according to local media.
In that case, Mr. Obama will either let default happen or find some way of defying the blackmailers, trading a financial crisis for a constitutional crisis.
The prices for credit default swaps, financial instruments that pay investors in the event that a default happens, imply just a 0.05 percent chance, or 1-in-2,000, of a default occurring within the next year, according to The Wall Street Journal.
As I understand it, countries that defaulted in the past were almost always downgraded well before the default happened; but in all such cases, the markets were already signalling big trouble before the rating agencies moved.
If last-ditch talks beginning Saturday fail, they will have to take responsibility if the unimaginable — a government default — happens in 10 days and the checks stop going out.
You could be forgiven for thinking that a default happened the moment the bond failed to do what it said on the label – ie pay a specified coupon and become redeemable at a fixed point in the future.
In order for the clearing systems to work, the Treasury would need to notify the market of a default almost a day before the default happened (to give everyone time to modify payments), and that is not going to happen because the Treasury will not want to declare default while Congress still has time to pass a bill.
When it comes to the purchasing power of an investor's money, what does it matter if the loss comes in the form of a formal default or erosion in real terms?The answer to that conundrum may be that default happens suddenly, whereas inflation and depreciation are slower, giving investors more time to adjust by demanding higher interest rates to compensate for their losses.
