Jean-Jacques Rousseau’s assertion that citizens must be forced to be free has been characterised as a seed of tyranny. Things are not so bad with the eurozone’s own Rousseauvian paradox: forcing creditors voluntarily to sign up for losses on Greek sovereign debt. The damage is still significant. By putting in doubt the viability of the sovereign credit default swap market, leaders are making the debt crisis worse.

The “haircut” on Athens’ obligations was designed so as to preserve the eurozone’s (unnecessary) conceit that none of its sovereigns could default. It was naive to think a distressed debt exchange could ever escape a rating downgrade. But by insisting that bondholders participate “voluntarily”, leaders try hard to avoid a “credit event” – a ruling by the International Swaps and Derivatives Association that CDS on Greek debt are to pay out. They seem to have got their way: ISDA indicates that CDS will not be triggered by a voluntary debt swap, even if it writes the bonds’ values down by half.

As a result, CDS have become less credible hedges against losses. There is no end to reasons why this is bad. Although it is hard to know for sure, it seems that European banks are net buyers of CDS protection, not issuers of it. When banks’ exposure to peripheral debt is threatening a cardiac arrest in the funding market, running roughshod through their hedges simply weakens them further.