During the same period as the volumes of credit derivative have grown most, interest rates have gradually fallen and credits have increased. There have been unusually few bankruptcies. The interest rate differences between high-risk and low-risk bonds have therefore declined, that is, credit spreads have shrunk. The price of credit derivatives has fallen correspondingly. The compensation for risk has thus reached a level far below the historical average. The question is what will happen when economic activity shows a downswing and the number of bankruptcies begins to increase again. If investors have in general underestimated the credit risk, we may see a substantial adjustment in risk premiums. This will also lead to a fall in prices of corporate bonds and credit derivatives. In this situation, individual actors with large net exposures in credit risks may be affected by significant losses. But I would like to emphasise that this is a general line of reasoning. If risk premiums rise, this would have effects on most markets. There is no particular reason to assume that the credit derivatives market would be hit harder than others. My opinion is that each of these risks should be taken seriously. But they are nevertheless not so large that they risk bringing about a serious systemic crisis in the international financial system. I have now discussed the credit derivatives trade in the international market. Here in Sweden trade in credit derivatives is still very limited. But let me nevertheless round off with a few comments on the Swedish market and its potential.
What would happen, for instance, if several credit events were to occur simultaneously? Perhaps there would suddenly be only sellers and no buyers in the market. Then prices will plummet. This was the case during the Russian debt crisis in 1998, for instance, when the LTCM hedge fund suffered problems. A crisis of  4  BIS Review 24/2007  this nature risks spreading rapidly to other financial markets and possibly threatening the lending banks. Such situations do not last particularly long, as buyers always appear when prices fall. This was also the case after the LTCM crisis. Remember also that the credit derivatives market and the market for the underlying bonds are tightly interwoven. If the premiums on credit derivatives increase substantially, this will mean that at the same time the return on the underlying bonds increases. Unless something important has happened that affects the credit rating of the company that has issued the bonds, it will sooner or later become profitable to buy them – or to buy the credit derivatives. Several large-scale credit events in recent years, such as the downgrading of Ford’s and GM’s credit ratings last spring, have also shown that more or less serious problems could be solved without liquidity in the market being affected to any great extent. 4. Risk of mispricing  Finally, I would like to bring up the risk of mispricing, a risk that in many respects is closely related to the liquidity risk.