EU to tackle speculators amid Greek fiscal crisis

08:28, March 11, 2010      

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The European Commission will crack down on speculative trading blamed for aggravating the Greek debt crisis.

"The commission has been actively working with euro area member states to design a mechanism which Greece could use in case of need," European Commission chief Jose Manuel Barroso said Tuesday in Strasbourg, France.

He also indicated the commission was planning a European monetary fund, based on the International Monetary Fund (IMF), to prevent a recurrence of instability in the eurozone stemming from the indebtedness of a single member state, although it would not come in time to help Greece.

Also on Tuesday, German Chancellor Angela Merkel, as head of eurozone finance ministers, said a European monetary fund to bail out eurozone nations in need would send a clear signal to markets speculating that the currency union would not break up. She said the crisis was forcing the European Union (EU) to make changes that would allow more "coherent economic policy-making."

"We are thinking of all eurozone nations," Merkel said. "We agree that we must discourage financial market speculation."

The European Commission said on Tuesday it would consider banning purely speculative trading of credit default swaps (CDS).

A CDS is a financial instrument usually used by buyers of a security such as a government bond to insure against the risk of default. In "naked" sales of CDS, the buyer does not hold the security and therefore has nothing to lose if a default happens, but he can make a profit if the price of the CDS rises due to increasing risk of a default.

Greek Prime Minister George Papandreou compared the practice of selling naked credit default swaps to buying insurance on a neighbor's house and then burning it down to collect.

Meanwhile, European officials urged the United States to join in action against speculators. After visiting Luxembourg, Berlin and Paris, Papandreou went to the United States to seek help.

"We have found a positive response from (U.S.) President (Barack) Obama which means this issue will be on the agenda at the next G20 meeting," Papandreou said Tuesday after meeting with Obama at the White House.

Earlier in the day, the White House said Greece's fiscal crisis "can and should" be resolved by the European Union. "They have and possess the capabilities to solve that," White House spokesman Robert Gibbs said.

Papandreou said on Sunday that Greece preferred a "European solution" to its deteriorating financial difficulties rather than going to the IMF, however, he said the European solution remained "very theoretical."

Speculators involved in naked sales of CDS were exaggerating the risk of a debt default of the Greek government and making profits from that, which in turn pushed up the interest rate demanded by investors on Greek government bonds.

Greece issued a huge bond last Thursday, raising a critical 5 billion euros (6.8 billion U.S. dollars) from international markets, at a notable interest rate of 6.11 percent. The country needs to refund 20 billion euros (27.2 billion dollars) by the end of the May to pay its debts.

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