Print

Mail

wiki links

EU executive mulls ban on ‘naked’ CDS selling

SPECULATION: European Commission President Jose Manuel Barroso said that the EU would like the G20 to discuss credit default swaps regarding sovereign debt

REUTERS , STRASBOURG, FRANCE, AND WASHINGTON
Thursday, Mar 11, 2010, Page 10

Greek Prime Minister George Papandreou, visiting Washington to highlight major power support as his country battles a serious budget crisis, said US President Barack Obama was encouraging of Athens’ efforts to restrict speculation.

“We have found a positive response from President Obama, which means that this issue will be on the agenda in the next G20 meeting,” Papandreou said after meeting with Obama at the White House.

Canada hosts the next summit of the G20 political leaders in June.

Commission President Jose Manuel Barroso separately said the EU’s executive would like the G20 to discuss speculation in credit default swaps (CDS), a form of insurance against default.

Some EU politicians accuse speculators of using these complex financial instruments to bet on a Greek bond default.

So-called “naked” selling involves selling a CDS to a buyer who does not hold the underlying sovereign bond. A naked CDS contract is typically a bet taken by investment firms like hedge funds that the bond’s issuer will end up in trouble.

“A new, ad hoc reflection is needed on credit default swaps regarding sovereign debt,” Barroso said.

“In this context, the commission will examine closely the relevance of banning purely speculative naked sales on credit default swaps of sovereign debt,” he said.

EU finance ministers and the European Commission are expected to discuss ways to dampen speculation on sovereign credit default swap markets at a meeting on Tuesday.

Barroso said the 27-nation bloc should tackle naked CDS selling in a coordinated way — a sign the executive does not want a repeat of unilateral moves by member states to ban shortselling in bank shares in 2008 that confused markets.

Analysts say the CDS market is too small to drive down underlying bonds or the euro and warn that a ban could backfire by sparking sales in government debt.

The noose is tightening around the sector, however, as French Minister of Economic Affairs, Industry and Employment Christine Lagarde said proposals on CDS selling would be unveiled in coming days.

Germany and Eurogroup President Jean-Claude Juncker have said they back such plans, but so far Britain, the EU’s main derivatives center, has not signaled any public support.

The G20 agreed in September that derivatives like CDS should be traded on an exchange and centrally cleared, where appropriate, in order to cut risk and improve transparency.

The commission has already said it would propose a draft law this summer to turn those pledges into EU law but Greece, France and Germany want the bloc to got a step further and crack down on naked CDS selling.

A commission proposal would have to be approved by a majority of EU finance ministers and the European parliament.

In Washington, Papandreou said the US leadership had an open mind about restrictions on market speculation.

“We ourselves were in the last few months the victims of speculators. Obama assured me that he considers the initiative useful, important, positive and that the United States will contribute in this direction,” he told reporters.

A US official, however, offered a measured response when asked about the call for curbs on instruments like CDS, leaving unclear the degree to which Washington supported Papandreou’s effort.

“The central task before the Greek government is to continue to move forward on their plans to restore fiscal stability and growth to its economy,” the official said.

This story has been viewed 563 times.