Survey Names Debt Derivative as Riskiest Financial Product

Friday, 15 Mar 2013 01:22 PM

 

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Beware the credit default swap on certain government bonds.

Credit insurance on some sovereign debt is the riskiest financial product out there, posing the greatest threat to investors who buy them and potentially to markets, said a survey aimed at finding the world's most dangerous financial product.

Almost half of the 2,000 people, including financial experts, who participated in the online survey named credit default swaps on government bonds in emerging markets as the "most dangerous" financial product.

The survey was organized by Sven Giegold, a German member of the European Parliament who has played an influential role in EU financial reform.

"This result shows that there are still a lot of dangerous financial products. European supervisors need to take the situation more seriously," Giegold told Reuters.

Anyone could participate in the survey although it was aimed at financial experts to gauge their views on which financial assets posed the most risk to investors and markets as a whole.

The survey was prompted by concerns that although many of the riskiest financial products, such as multi-tiered synthetic CDOs (collateralised debt obligations), unravelled when the 2008-09 global financial crisis struck, many others remain in circulation.

Credit default swaps are a form of tradeable insurance against the non-payment of debt, such as a corporate or government bond. At the height of the crisis, their price climbed for countries such as Greece, exacerbating borrowing difficulties.

Giegold hopes his competition will spur supervisors and regulators into taking more action, such as banning certain high-risk products.

"There are so many toxic products out there that identifying the worst one is tricky," said Frederic Hache, a former banker who sold structured products and now works for Finance Watch, a public-interest group that seeks to influence regulation.

"Some of the key factors that caused the crisis, however, are not linked to specific products but rather to the architecture of the financial system," he said.

© 2014 Thomson/Reuters. All rights reserved.

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