Barroso considers ban on speculation with sovereign debt

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The European Commission said on 9 March it will consider banning 'naked' selling of derivatives contracts and Greece said curbs on speculators would be examined by the G20 powers.

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," the Greek prime minister said after meeting with Obama at the White House. Canada hosts the next summit of the Group of 20 political leaders in June.

Commission President José Manuel Barroso separately said the European Union'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 Commission are expected to discuss ways to dampen speculation on sovereign credit default swap markets at a meeting on 16 March.

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, which 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.

CDS plans in days

The noose is tightening around the sector, however, as French Economy Minister Christine Lagarde said proposals on CDS selling would be unveiled in the coming days.

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

The G20 agreed last 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 will 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.

Transatlantic cooperation

Barroso said transatlantic cooperation among CDS regulators also needed raising and that a study of the CDS market should look for any "questionable practices" which could be dealt with under the bloc's competition rules.

Britain is Europe's biggest CDS centre and a bloc-wide initiative from the Commission - as opposed to one from eurozone countries like France - could have a bigger impact.

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.

Two central bankers on Tuesday also saw the need for central clearing of derivatives as part of wider efforts to make markets safer and learn from the financial crisis.

Chicago Federal Reserve Bank President Charles Evans said there was a need to study the CDS market carefully and that such products can offer hedges that can be valuable to firms.

Proposals to net CDS positions in a clearing house would be useful, Evans told reporters in Arlington, Virginia.

Bank of France Governor and European Central Bank Governing Council member, Christian Noyer, said clearing houses should be set up in each major currency area where CDS contracts are transacted and be locally supervised.

(EurActiv with Reuters.)

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