Official: CDS didn’t cause Greek tragedy

AN EU investigation revealed yesterday that trading in sovereign credit default swaps did not cause a spike in borrowing costs for states such as Greece this year.

The report, commissioned by EU finance ministers in March, 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,” the report said.

It follows tough new European Commission proposals published in September that 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 a UK member of the European Parliament, Syed Kamall, lashed out at the draft legislation.

“The paper says that restrictions on credit default swaps of sovereign bonds is bad policy. Yet this is exactly what the Commission regulation is pushing for,” he said.

The Conservative MEP, said a crackdown on sovereign CDS could push up yields on government borrowing.

“With rapidly rising bond yields in Ireland, Portugal, Spain and Italy, we certainly should not be adopting policies that could make these yields rise further,” he said.

The report concluded that CDS trading even helped lower the cost of funding sovereign deficits, as by insuring the debt they enabled institutional investors to take on more and kept yields for troubled countries “lower than otherwise would be possible,” it said.