INVESTORS are now better placed to identify risky government debt thanks to the growth in the sovereign credit default swaps (CDS) market, a new report has found.
However, that has had a negative impact on debt-laden governments as investors find it easier to see when a state like Greece is struggling, according to the International Organisation of Securities Commissions (IOSCO).
The products, which insure against states failing to pay their debts, became increasingly popular in the financial crisis as investors sought to protect themselves from a default.
Many EU politicians argued in 2010 that hedge funds short-selling CDS linked to Greek debt made it more costly to put together the country’s first bailout package.
It led to the EU approving a law to ban “naked” short-selling of sovereign CDS from November this year. A naked or uncovered CDS contract is one where the buyer does not own the asset being insured from default.
However, this report found no firm evidence that short-selling raised Greece’s borrowing costs.