There is a meme going around that because some financial players own CDS on Greek debt and the prices on those swaps have increased, that the actual risk of default is now higher as a result of the price increases. See this article in the New York Times, which is dependably ignorant of and hostile towards markets:

Bets by some of the same banks that helped Greece shroud its mounting debts may actually now be pushing the nation closer to the brink of financial ruin.

Echoing the kind of trades that nearly toppled the American International Group, the increasingly popular insurance against the risk of a Greek default is making it harder for Athens to raise the money it needs to pay its bills, according to traders and money managers.

This is akin to saying that when the price of a weather derivative on say a cold Florida winter increases, the actual chance of frost on the orange trees is higher, simply because some traders have a vested interest in that outcome.

Actually, if anything, the availability of swaps on credit cheapens the cost of that credit, benefiting the borrower, since lenders are able to shift some or much of the risk to third parties. The fact that some buyers of CDS do not own the underlying bonds only serves to add liquidity to the market and even further reduce the cost of insurance.

I suspect that when players like Angela Merkel blame swaps for Greece’s situation, they are being disingenuous and simply trying to extort hedge funds and other players in the market and win points with the public. In the case of Greek politicians, it is a very convenient way to shift blame.