> equivalent would be that you're allowed to take out a fire insurance policy on your neighbors house, and then proceed to smoke cigarettes and flick the lit butts at his house
Yes, hedge funds (and everyone) are allowed to bet on this. If there's an issue here, the question is who is selling fire insurance policies (at non-exorbitant rates) when they know that arsonists are around? If it's European banks that know they'll be bailed out, that's a problem.
In theory, all CDS trades are registered with DTCC since 2009, and my understanding is this works pretty well for contracts as standardized and liquid as Greece. See also the WSJ article linked by ristretto below.
Yes, hedge funds (and everyone) are allowed to bet on this. If there's an issue here, the question is who is selling fire insurance policies (at non-exorbitant rates) when they know that arsonists are around? If it's European banks that know they'll be bailed out, that's a problem.
In theory, all CDS trades are registered with DTCC since 2009, and my understanding is this works pretty well for contracts as standardized and liquid as Greece. See also the WSJ article linked by ristretto below.
source: http://www.dtcc.com/news/press/releases/2009/cds_contract_va...
data: http://www.dtcc.com/products/derivserv/data_table_i.php?tbid... (see 'Hellenic Republic')
some analysis of data integrity: http://www.bis.org/publ/qtrpdf/r_qt0912y.htm
thanks to: http://www.zerohedge.com/article/debunking-some-myths-about-...)