The Rise of Credit Default Swaps and the Changing Political Environment of Sovereign Debt Markets
Bibliographic record
Abstract
In the last decade, the market for Credit Derivative Swaps (CDS) has greatly increased in size from a relatively small beginning in the mid-1990s. According to estimates, the gross notional amount of CDS instruments outstanding increased from 2 trillion US Dollars at the end of 2002 to more than 30 trillion by the end of 2009, after reaching a peak of 58 trillion in 2007. Although a large part of the CDS market is concentrated on credit instruments related to or issued by private debtors in the US domestic market – such as bonds and loans of US corporations and mortgages – a sizable portion of the CDS currently traded is derived from debt instruments issued by sovereign debtors. After the latest financial crisis in the US, and the spectacular failures of financial institutions that were active traders in credit derivatives such as Lehman Brothers and AIG, the attention of scholars, policymakers, and the public has turned to the role of CDS in promoting instability in both national and international financial markets. Consequently, a lot of attention has been paid to market size and concentration, and the systemic risks thereof. However, relatively little is known about its organization and functioning outside some finance and Economics circles, and even less is known about its impacts on state policies. Moreover, the political science literature on the political impact of credit derivatives is very limited at best. In part, this is understandable, given the recent history of the development of CDS and the small size of the market at the time of the last major sovereign credit event in history, the Argentine Crisis of 2001. But this also means that the current literature on CDS, due to its biases and concerns, has neglected important questions about the politics of derivatives: what are the political and redistributional consequences of financial instruments such as CDS on the countries at the periphery of the system? How CDS affect the access of sovereign debtors to capital and, more importantly, their agency and autonomy vis-a-vis their creditors? How CDS affects the power structure of the broader international market? Since the CDS market is an important and interesting case understudied in political science, my paper focuses on the development of CDS connected to sovereign debt instruments to tackle such questions. I describe and analyze how CDS developed and their main functions in the broad capital market. I then move on to the relationship between sovereign borrowers and lenders, and map the main political issues raised by CDS: their effects on the agency of states and their creditors, the changes they introduced to the preferences of market participants, and their impact on (i) the production of knowledge in the market, (ii) the access to and distribution of capital and other resources such as information, (iii) the formation of prices, and (iv) the general distribution of power in the market. Subsequently, I end the paper by analyzing the potential policy implications of CDS to the prevention, management, and solution of sovereign debt crises.
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How this classification was reachedexpand
Full frame machine prediction
Teacher imitationNot calibrated prevalence, not ground truth. Human validation pending. The Gemma side is a direct model label for every work in the frame, read from the title-only record. The Codex side is a classifier learned from the 10,348 direct Codex labels and calibrated to design-weighted sample rates; fields without enough sample support carry no Codex call. Candidate is the union of the two sides; consensus is their intersection. These outputs are machine_predicted_unvalidated and are not human labels.
Distilled classifier scores by category (both heads)
| Category | Codex | Gemma |
|---|---|---|
| Metaresearch | 0.002 | 0.009 |
| Meta-epidemiology (narrow) | 0.000 | 0.000 |
| Meta-epidemiology (broad) | 0.000 | 0.000 |
| Bibliometrics | 0.001 | 0.002 |
| Science and technology studies | 0.002 | 0.005 |
| Scholarly communication | 0.006 | 0.008 |
| Open science | 0.000 | 0.002 |
| Research integrity | 0.002 | 0.005 |
| Insufficient payload (model declined to judge) | 0.010 | 0.001 |
Machine scores (provisional)
The two teacher heads of the student model, read on this work. A score orders the frame for review; it never asserts a category, and the validation status ships verbatim with every row.
Baseline scores from an immature model (maturity gate not passed, 7 training rounds). Scores rank; they never assert a category.
score_only:v0-immature-baseline · verbatim from the scoring run: score_only means the number may rank works, and no category label ships from itClassification
machine, unvalidatedMachine predicted; a candidate call from one source (direct Gemma or distilled Codex), not a consensus.
How this classification was reached, model by model and score by score, is at the end of the page under "How this classification was reached".