The situation in Greece is "clouded" by derivatives and credit-default swaps, whatever they are. It sounds like institutions buy insurance against loan defaults of others, and somehow make money from those.
Let's start where I often start: definitions.
Derivatives: according to Wikipedia, a derivative is "a financial instrument whose value depends on underlying variables." Um, not very helpful, but let's read on...a derivative "is essentially a contract whose payoff depends on the behavior of a benchmark." O...K....maybe we can find another definition.
Let's try Investopedia - that sounds pretty wonkish.
A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage. (I remember studying leverage in high school physics.)
Hmmm, let's read on:
Futures contracts, forward contracts, options and swaps are the most common types of derivatives. Derivatives are contracts and can be used as an underlying asset. There are even derivatives based on weather
Oh great, now were into forecasting the weather! , such as the amount of rain or the number of sunny days in a particular region.
Maybe "credit default swap" will be easier to understand, and I'm liking Investopedia, so let's stay with them.
Credit default swaps (CDS) are the most widely used type of credit derivative and a powerful force in the world markets. The first CDS contract was introduced by JP Morgan in 1997 and by mid-2007, the value of the market had ballooned to an estimated $45 trillion, according to the International Swaps and Derivatives Association - over twice the size of the