When Derivatives Can Be a Problem

As with Greece, a government can hide its long-term, poor fiscal position with short swap, or credit default derivatives. This paper manipulation made things look what they were not with Greek’s financial deficit spending over recent years.

Using derivatives for deception is a no-no.

On the other hand, derivatives have a legitimate function in government financing, as they do in normal business and financial transactions.

Eliminating derivatives or making them tougher to write, will dry up the supply of conventional debt financing, That will simply make it tougher for governments such as Greece to get credit. They will then sell their bonds only at much higher interest cost.