Analyze On Catalytic Function Of CDS Transaction To Greece Sovereign Debt Crisis

At the end of2009, Greek sovereign debt crisis swept across the Europe so thatcountries of the Euro-zone suffered a severe shock of economic. Even now, they arestill struggling. Scholars at home and abroad generally believe that the sovereign debtcrisis can not be avoidable because there are natural defects inside Euro-zone, inaddition, Greece and some countries’ domestic economic structure is unreasonableand global economic stays continuous stagnant. Meanwhile, as the representative offinancial derivatives, the CDS transaction in the name of innovation does speculationand arbitrage, which has the unshakable responsibility to aggravate the economiccrisis. In the case of Greece, this paper, at first, summarizes the development andreasons of sovereign debt crisis, with the Bubble theory and the VEC model, and thenanalyzes the catalytic effect of the CDS transaction to sovereign debt crisis from boththeoretical and empirical aspects.This paper holds the view that CDS, which is regard as over-the-counter(OTC)financial derivatives, on one hand, lacks of transparent supervision mechanism and on the other hand, manyfold accumulates risk by leverage effects and loses its initialdesigning function to avoid credit risk in the process of Greek sovereign crisis’sworsening, especially CDS price is over10000at the end of2011. On theoreticalaspect, pessimistic expectations and speculative forces produce great asset pricebubble at CDS market and boosts CDS price, which increases the financing cost ofGreece. In the vicious circle——rise in price increases the financing cost, and thenthat leads to the fund shortage so as to cause the crisis more serious——Greece isbogged down deeper and deeper. On empirical aspects, though comparing GreeceCDS prices and bond yields from2007to2011, the curve graph shows that theiruptrends are highly fit in time. Moreover, the result of Granger test turns out thesignificant positive correlation between the two and VEC model also indicates the1.8213%positive influence on CDS transaction to bond yields. They both stronglysupport this view that the soaring price of CDS has a great catalytic effect onsovereign debt crisis’ worsening.