City hits out at speculation ban

CONTROVERSIAL proposals to impose strict curbs on speculators using credit default swaps to bet against troubled states like Greece were yesterday widely slammed by the City as misguided and unworkable.

Greek Prime Minister George Papandreou will today meet with US President Barack Obama to drum up support for his campaign, after he claimed at the weekend that eurozone measures to tackle CDS (credit default swaps) speculators would be unveiled this week.

“We need clear rules on shorts, naked shorts and credit default swaps,” Papandreou said in Washington yesterday. “I hope there will be a positive response from this side of the Atlantic to bring this initiative to the G20.”

But the City dismissed the crackdown as unworkable. Terry Smith, chief executive of broker Tullett Prebon, compared the plans to “someone suffering a major injury and then being supplied with a strip of Elastoplast”.

“Whether you reflect back on the Asian currency crisis of the Nineties… or on 2008, when regulators banned short selling of financial stocks, the crises weren’t caused by speculators,” Smith added.

Markus Allenspach, the head of fixed income research at Julius Baer, said CDS may have accelerated market moves but did not cause any of the underlying imbalances. “This is shooting the messenger,” he said.

The crackdown on speculators also got short shrift from bond market experts who said it would be impossible in practice to unravel the complex interrelated web of CDS positions.

“Unless policymakers make it absolutely clear what does and does not count, uncertainty will cause extreme volatility, and they run the risk of ending up with worse problems than they started with,” said Simon Thorp, head of fixed income at Liontrust Asset Management.

The City’s rejection of the proposals came after European pledges of support to Greece helped the yield spread between 10-year Greek bonds and Eurozone benchmark German bunds shrink to under 2.9 per cent.

Portugal yesterday became the lates country to announce austerity plans to cut its deficit from 8.3 per cent to 2.8 per cent of GDP by 2013.