On March 9, 2012, the Greece took action to subdue speculation of a sovereign debt default. They successfully negotiated $130 billion debt forgiveness with all private bondholders on CDS (Credit Default Swaps). The private bond holders of the Greek sovereign debt agreed to 75 percent loss of their holdings. The outcome of this swap is that Greece managed to restructure its sovereign debt without a theoretical default. The buyer of the CDS will get paid by the insurance that they carry on the swap. Some trade groups such as the International Swaps and Derivatives Association call it a “credit event”. However, the event didn’t create a panic event and the financial markets are at ease at the moment.
CDS is a financial agreement between the seller and the buyer. In the event of a loan default the seller agrees to compensate the buyer usually the face value of the loan in installments. CDS were invented by the Wall Street in 1990s as a form of insurance. Banks and financial institutions use CDS to hedge against losses. It is a low cost way of taking on credit exposure.
The CDS were not regulated until the Dodd-Frank financial regulatory reforms which now include CDS.