Sarkozy, Merkel lead proposal for greater regulation of credit default swaps, derivatives

Sarkozy, Merkel propose clampdown on speculators

THE HAGUE, Netherlands — French President Nicolas Sarkozy and German Chancellor Angela Merkel called Thursday for a clampdown on the type of speculative trading that exacerbated Greece’s debt crisis and undermined the euro in recent weeks.

In a letter released Thursday, Sarkozy, Merkel and the leaders of Luxembourg and Greece asked European Commission President Jose Manuel Barroso to launch an inquiry into the role of credit default swaps in the trading of government bonds in European countries.

They called for mandatory reporting of all derivatives trading in Europe and said the EU should consider banning speculative trading in credit default swaps. They also proposed new curbs on market abuses and improved safety in private derivative trading.

“Only the European Commission can do this, it has to be done Europe-wide. This is not something that a single country can do,” hence the joint initiative, Merkel said in The Hague, after talks with Dutch Prime Minister Jan Peter Balkenende.

Credit default swaps are a form of insurance for buyers to protect them against the risk that a seller or borrower would default on a security such as a government bond.

Greece argues that traders of the swaps who bet against Greece’s debt are raising its borrowing costs, making default more likely. It claims trading of swaps — which is unregulated — is racking up big profits for Wall Street banks and hedge funds at Greece’s expense.

In Washington this week, Prime Minister George Papandreou likened the practice to buying insurance on a neighbor’s house and then burning it down to collect.

Merkel said that the EU needs to look at better enforcing its Stability and Growth Pact, which underpins the euro by calling for national debt not to exceed 3 percent of gross domestic product. Greece’s debt is more than four times that limit.

“I also think … we should consider how we can have better sanctions in future to prevent such a situation, but this is not an answer to the Greece question, but needs a change to the treaties,” she said. “In the long term there is agreement in saying that we need stronger instruments to enforce the stability pact.”

Merkel also paid tribute to Greece’s efforts to dig itself out of its economic crisis.

“The Greek government has taken a first courageous step, that is very much to be recognized. … It must now be implemented, and we have already seen that the markets have reacted positively,” she said, in a reference to last week’s successful Greek bond issue.

The five-year bond was three times oversubscribed, with €15 billion in offers received, a Finance Ministry statement said last Thursday. The government took €5 billion ($6.83 billion), offering a 6.3 percent yield.

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Associated Press Writer Geir Moulson in Berlin contributed to this story.