Which brings me to my other worry about CDS, the sellers. Do we know that they can actually afford to pay up if the Greek government defaults? What about those selling CDS on UK or US government debt? Can one buy a CDS on one’s CDS seller defaulting?

1) You own Greek Government debt and are worried, you buy a CDS.

If you are worried, either don’t own the debt or demand a higher interest rate. Put another way, does the existence of debt insurance (via CDS or anything else) reduce the feedback the market should be giving to the debtor?

And guess what will happen then? Yes, you’re right. The premium which the Greek Government has to pay to borrow will then rise.

This will therefore make the problem worse, not better. Well done chaps.

OK, making markets less efficient is generally bad, but in cases like this (don’t want to pick on just the Greek government), we want the premium they pay to rise, as that is what will force them to alter their behaviour, i.e. to reduce borrowing, or better yet to stop borrowing altogether.