I expect much of the exposure is in the form of credit default swaps (CDS). A CDS is an instrument by which the insurer assumes the risk associated with some r

I expect much of the exposure is in the form of credit default swaps (CDS). A CDS is an instrument by which the insurer assumes the risk associated with some reference instrument in exchange for a cut of the revenue associated with that instrument. In the case of a 2-year Greek bond (currently yielding 20%), Alice and Bob might draw up an agreement that says that Alice can have 15% throughout the term of the bond as long as she pays Bob the defaulted amount in the case of default. These instruments are, by themselves, not particularly dangerous. What is dangerous is that there is generally no regulatory requirement for the people who are selling these contracts to actually have any money, which means that the people who are buying these contracts might be greatly understating their exposure. If there are large numbers of outstanding unbacked CDS, the situation is similar to what occurred with AIG in 2008. Because CDS are not exchange traded, we don't have a reasonable way of knowing how much risk is out there.