Debt crisis demands strong financial regulation in West (2)

22:13, May 12, 2010      

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The borrowing costs of the Greek government could accordingly also surge, making it harder for Athens to meet its debt obligations.

The most problematic element is that the CDS market is not centralized. Its over-the-counter nature means investors and regulatory bodies have not sufficient information to understand what is going on. In other words, the market can be manipulated by major financial companies to turn their bets on government debt into large profits.

The role of international credit rating agencies is also dubious. Firms such as Standard & Poor's, Moody's Investors Service and Fitch are given too much power with no effective review or supervision in deciding who is creditworthy and who is not.

They have accumulated enormous authority over the years to the point where their decisions, which carry such gravity, go unquestioned and unchallenged.

Abusing the blind trust of investors, debt issuers and regulators, credit raters have turned financial products into a pool of toxic waste, leading to the outbreak of the subprime mortgage crisis in the U.S. in 2007.

If left unchallenged, this kind of authority will ensure their decision-making continues to escape objective assessment and the turbulence in the financial markets will spread from the eurozone to the entire world.

Developing countries, which have always been persistent and full-throated advocates for greater international financial regulation, are also the victims of the cascading economic turmoil, whose epicenter is found in the developed world.

In retrospect, the Asian financial crises in the 1990s were also created by excessive speculative behavior of some Western investors, who had not been properly regulated back in their home countries, not to mention at the international level.

Without comprehensive financial reform and a tighter regulatory system, the next round of economic chaos will be the next in a line of dominoes, the first block of which has already been knocked down.

[1] [2]


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