The vast credit-default swaps market got a jolt last week, sparking worries of new strains in the global financial system. Under the broad deal reached this week to stem the euro-zone's financial crisis, holders of credit-default swaps on Greek government bonds aren't expected to receive any payout. That's despite a preliminary agreement between financial institutions and European policy makers would recognize just half the face value of some Greek debt. The decision not to trigger the swaps raises questions about the value of the insurance-like contracts and exposes the limitations of the hedging strategies that banks and investors have come to rely on. If the swaps don't pay out when bonds default, banks and funds that bought the insurance may face losses they thought they had hedged. In the case of Greece, losses appear to be manageable because of the country's relatively small size. Up to $3.7bn in credit-default swap payments would change hands in the event of a default, a far cry from Greece's $496bn government debt. Some market observers warn that the decision could prompt investors to back away from trading swaps on other European countries, potentially reducing demand for government bonds and further constraining credit. The deal European leaders reached with banks will see some private holders of Greek debt accepting what they call a "voluntary" 50% reduction in the principal amounts they are owed. That is significant because the terms governing credit-default swaps on European sovereign bonds imply that a voluntary debt restructuring won't trigger payouts to buyers of protection. European leaders have repeatedly signaled over the past year their desire to avoid debt defaults that would trigger credit-default swap payouts. Politicians have been loath to devise solutions to the debt crisis that end up rewarding speculators and providing them with a windfall from swaps payouts. Even so, the failure of the swaps to pay out could push some investors out of the market for European government debt, some investors said.  [WS Journal, 10/28/11]