Friday's WSJ front-page headline reads "Cheers and Skepticism Greet European Deal." I took a deep breath this afternoon and read both of the articles linked to this headline, one datelined Berlin and the other Brussels. More required reading lives inside Section A of the paper (yes, I still prefer that hard copy. Sorry.). There I learned again of Credit Default Swaps or CDSs. These are financial instruments bought and sold in what the WSJ calls a "default insurance market," a "vast market in which banks, hedge funds and investors trade insurance against debt defaults." Debt like Greek government bonds.
The deal worked out by "euro-zone leaders" games the CDSs by skirting the technical definition of default in these contracts by defining the principal reduction that is required of lenders as "voluntary." So, then, your house is burning down and the government and your insurance company are making a deal that will give you pennies on each dollar of insurance you thought covered your risk. And you had better take it voluntarily, or find your government not very helpful in providing the permits to rebuild your home, assuming you otherwise have the money to do so.
The price that banks charge for their loans is less expensive where they can hedge in an unhindered default insurance market. Now that the market has been gamed, it will be more expensive for borrowers to get financing for ventures that will grow the European economy. The economy may grow again. Someday. But it will be much slower.