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When big investors saw Greece falling into deep financial trouble this year, some of them turned to a familiar ally to profit from the nation's fiscal crunch: the credit default swap.

 

The swaps, often called CDS for short, are financial instruments that allow investors to place money on the risk that a company or country won't be able to pay its debts. Nowadays, they can place such bet against nearly every country, from economic powerhouses like Germany and the U.S. to those of marginal economic significance, such as El Salvador and Guatemala. Right now, prices for Greek swaps are through the roof.

 

But there's one country investors can't, or at least won't, bet against: Canada.

 

Canada is almost alone in the world in not having actively traded insurance contracts on its government debt. Despite large deficits, no one, it seems, is willing to bet that Ottawa will try to walk away from its debts.

 

“It’s quite unusual actually,” said Gavan Nolan, a credit analyst in London for Markit Group, a financial data firm that tracks swap prices.

 

Credit default swaps were once obscure financial instruments, but they have emerged as key indicators of the severity of the ongoing sovereign debt crisis in Greece. When investors and speculators are worried over the ability of a government to repay its bonds, they bid up the price of swaps, which are insurance contracts that pay out in the event of a debt default.

 

Current swap prices indicate that the Greek government is one of the world’s riskiest borrowers, a distinction it holds with other countries that market players think are at high risk of becoming deadbeats, such as Pakistan and Venezuela. The government that swap market participants deem least likely to balk on its debt is oil-rich Norway.

 

While the debts of most countries have spawned a lively over-the-counter market where swaps are bought and sold, for Canada there is “barely any market at all,” according to Mr. Nolan. Tuesday was a typical day when it came to credit default swaps on Canada: There was no trading and no prices quoted.

 

Swaps are useful to investors because they give a clear and immediate picture of the creditworthiness of a country. Because Canada doesn’t have them, market views of its solvency are more opaque. Investors have to rely on less-precise indicators, such as trends in the interest rate Ottawa pays on its debt, which reflect some of the risk of lending to the government.

 

While there are no definitive answers on why swaps on Canada aren’t done, a possible explanation is the country’s sterling credit, relative to others.

 

Canada is running a budget deficit of $50-billion, but the amount is only 3 per cent of GDP, compared to the scary levels of around 10 per cent or more for the U.S., Greece and Britain. Canadian banks are also highly regarded, lessening the risk that the federal government will have to rescue them during a panic and worsen its own balance sheet through a costly bailout.

 

The perception that Canada is in good shape is “definitely one of the main factors that we heard” on why there are no swaps, Mr. Nolan said.

 

He said that if swaps were traded on Canada, they would be at a low price signifying little default risk, although it would be “hard to say” whether the insurance would be more costly than for the world’s currently recognized safest sovereign debtor, Norway. It costs $16,000 to insure $10-million of notional amount of Norwegian debt. Swaps on the same amount of Greek debt, by contrast, cost about $726,000 to insure, an amount that has nearly doubled in the past month.

 

Another view is that the federal government hasn’t issued a large amount of debt outside the country, creating a bond market that is just too illiquid to support the need for much insurance.

 

The absence of swaps on Canadian debt creates oddities in the market. Markit has an index that tracks the default risk of the seven governments of the G-7 industrialized countries, but there are only six constituents in the index because there is no pricing data for Canada.

 

CMA, a firm specializing in credit information, recently issued a report on the world’s safest and riskiest government debt, but there was no mention of Canada, taking many market players by surprise because the fact that swaps don’t exist on Canada isn’t well known. “Quite a few people” contacted the firm asking why Canada was left off the list, says Simon Mott, a CMA marketing manager. “There is a very scarily simple answer to this, which is that there is no CDS for Canada.”

 

Speculators buy swaps because they can be a cheap and profitable way of making money by betting against the debt of a country. Those writing the insurance view it as an easy way to make extra money when they believe a country won’t walk away from its debts.

 

The lack of swaps could suggest that speculators think wagering against Canada isn’t a winning trade, at least for now. “Why buy insurance when it’s guaranteed” not to default, says Millan Mulraine, economics strategist at Toronto-Dominion Bank. “The demand [purchasers of swaps] may know that and may not want to give away that free money” to sellers of the insurance.

 

(Courtesy of The Globe and Mail)

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Nice article, I spent 2 years of my life developing a pricing platform for CDS contracts!

 

I believe it's still in use today.

 

CDS contracts are highly profitable but are not for you-and-me investors.

 

To buy/sell CDS, you have to call directly Goldman Sachs or JP Morgan and ask them to quote you a price for such country or company ( the platform used at Morgan Stanley was done by my team)

 

It's usually very expensive to invest in such product. Not only do you have have to pay a monthly fee of several thousand dollars, but you also have to pay upfront fees of tens of thousands of dollars.

 

It's one of the most leveraged product out there. A change of 1% in the yield of a sovereign bond could mean a profit/loss of up to 50% for the investor.

 

I also believe another reason why the market is dead in Canada, is the lack of big players here.

Canada doesn't really have hedge or advanced financial institutions. Big canadian investors are conservative and don't like exotic products.

Canadian banks are 'boring', they still do the same bussiness as they did 20 years ago.

 

In the USA or Europe, many banks have departments that look like NASA's research department!!

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Still beats raising the TVQ.:rolleyes:

 

baisser la TPS vient de créer un déficit structurel de plusieurs milliards par année ( selon le comité des finances indépendant du gouvernement). C'est tout sauf une gestion intelligente des dépenses.

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baisser la TPS vient de créer un déficit structurel de plusieurs milliards par année ( selon le comité des finances indépendant du gouvernement). C'est tout sauf une gestion intelligente des dépenses.

 

bullshit, il n'y avait pas de déficit structurelle même avec la baisse de la TPS avant la crise économique.

 

C'est une ruse pour couper dans les programmes du gouvernement, 1.7 milliards cette année dans tous les ministères, tu regardes les nouvelles?

 

Déjà le déficit est moindre que prévu pour l'année financière qui se termine, avec une économie plus robuste que prévue.

 

On s'en reparle dans une couple d'années.

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bullshit, il n'y avait pas de déficit structurelle même avec la baisse de la TPS avant la crise économique.

 

C'est une ruse pour couper dans les programmes du gouvernement, 1.7 milliards cette année dans tous les ministères, tu regardes les nouvelles?

 

Déjà le déficit est moindre que prévu pour l'année financière qui se termine, avec une économie plus robuste que prévue.

 

On s'en reparle dans une couple d'années.

 

Bon OK. c'est une conspiration. Des fonctionnaires ont été payé pour affirmer faussement qu'il y a un déficit structurel. Comme ça le gouvernement pourra couper dans les programmes car cela est diabolique.

 

 

Voyons voir, tu as le choix entre baisser la TPS ( subventionner la consommation) ou baisser les impôts ( subventionner et encourager le travail).

 

La seule façon de profiter de la baisse de la TPS est de... dépenser de plus en plus.

Une baisse des impôts profite à tous ( en tout cas tout ceux qui travaillent, si tu vois ce que je veux dire) sans aucune restriction.

 

D'un point de vue économique, une baisse de la TPS vs. une baisse des impôts est indéfendable, et je crois que c'est ce que la majorité des économistes et autres reprochent au gouvernement.

 

Une baisse de la TPS c'est une bonne bar de chocolat, une baisse des impôts c'est plein de bons légumes.

Edited by cjb
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