Why has it been so important to claim that the emperors are wearing clothes?* Perhaps this:
The grave danger is that, if Italy stops paying its debts, creditor banks could be made insolvent. Goldman Sachs, which has written over $2trn of insurance, including an undisclosed amount on eurozone countries' debt, would not escape unharmed, especially if some of the $2trn of insurance it has purchased on that insurance turns out to be with a bank that has gone under. No bank – and especially not the Vampire Squid – can easily untangle its tentacles from the tentacles of its peers. This is the rationale for the bailouts and the austerity, the reason we are getting more Goldman, not less.Default, in other words, would require GS to pay $2 trillion of claims (or pay something against losses on $2 trillion of policies; not clear) at the same time as GS may not be able to lay off those claims on other
That's why Goldman Sachs -- as the article makes clear -- has got its people working overtime to make sure that European politicians and bureaucrats (many of them Friends of GS) do not formally announce default -- something I recommend as the first step in recognizing reality.
Bottom Line: Goldman's attempts to protect its terrible decisions are dragging EU countries and citizens into a lifetime of debt -- all to make sure that traders keep bonuses awarded when times were "bubbly" (while still taking home a bonus when the company loses money!)
* When a creditor says he will repay 50% of the money he owes you, he's defaulting on that debt, whether or not you "voluntarily" accept that fact!
Addendum: A semi-relevant discussion of CDSs on Marginal Revolution.
Addendum 2: Paulson (ex-GS) gave insider information on FannieMae/FreddieMac.