Bundesbank: CDS did not cause crisis

GERMANY’S central bank said yesterday that speculative trading in sovereign credit default swaps (CDS) was not to blame for the Eurozone debt crisis.

In its December report, the Bundesbank said that a spike in the cost of insuring sovereign debt using CDS was not down to excessive speculation by traders.

Instead, movements in CDS prices for peripheral Eurozone economies – like Greece, Spain and Ireland – was due to specific problems in those countries, the Bundesbank said.

It added that the CDS market had responded well to important information about the financial strength of these countries, such as credit rating agency downgrades.

The Bundesbank also found that suggestions speculative traders pushed up the price of CDS to make a quick profit was “not confirmed by empirical data”.

The report backs up a similar investigation by the European Commission, which also found that trading in sovereign CDS was not to blame for a spike in borrowing costs for the likes of Greece.

The report, published earlier this month, found “no conclusive evidence” that developments in the CDS market affected the cost of state borrowing.

It praised the “efficiency of CDS markets in sovereign debt” and said they had little influence on bond yields even where governments faced funding difficulties.

“CDS spreads for the more troubled countries seem to be low relative to the corresponding bond yield spreads, which implies that CDS spreads can hardly be considered to cause high bond yields for these countries,” said the report, which was commissioned by European finance ministers in March.

The findings come hot on the heels of tough new European Commission proposals published in September, which aim to tighten rules on short selling and restrict trading of CDS on sovereign debt, where investors effectively take a short position on EU government bonds.

But Syed Kamall, a UK member of the European Parliament, has warned the crackdown could actually lead to higher sovereign borrowing costs.