A Conundrum

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The EU authorities propose to entice investors to return to buying peripheral sovereign bonds by offering tradeable first-loss protection on those bonds. This protection is described as functioning like credit default swaps. At the same time, the EU authorities assert that the solution to Greece's sovereign debt overhang is for private holders of Greek debt to "voluntarily" agree to take losses on their GGBs. The holders of these bonds will be strong-armed into taking these losses in such a way that CDS will not trigger and therefore provide no cover on those losses. That's sort of like trying to woo your girlfriend with promises of everlasting fidelity, as demonstrated by how quickly you'll leave your wife for her.

Will the market fall for it?

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