EU’s Barnier pledges to tackle CDS

City A.M. Reporter
The European Commission will propose controls on how investors bet on the chances of government debt defaults as soon as June to curb speculation blamed for aggravating Greece’s borrowing problems.

Restricting trading by hedge funds of sovereign credit default swaps (CDS) or debt insurance, is high on the European Union’s political agenda as finance ministers examine a possible bailout of Greece, the eurozone’s most troubled economy.

Yesterday, Michel Barnier, the European commissioner in charge of financial market regulation, said he would propose rules to control buying of CDS by speculators who do not own the bond it insures – otherwise known as naked buying.

Speaking to members of the European Parliament, whose backing is needed for the proposals to become law, former French foreign minister Barnier said he would publish draft rules as soon as June.

It is the latest initiative by the EU executive, which is overhauling financial services with regulation spanning curbs on banker bonuses to demanding that lenders set aside more for unpaid loans. France and Germany in particular have criticised naked buying of CDS, while the US and Britain believe a ban on such trading would be unworkable.

Investors who own government debt buy credit default swaps to insure against the risk of default, and the cost of CDS fluctuates depending on the creditworthiness of the country. In Greece’s case, the price of CDS contracts soared when it became clear the government might be unable to repay its loans.

This heightened fears of Greek default, making it harder for Athens to borrow.