Germany moves to out Greek debt speculators – source

By Reuters Staff
March 1, 2010

By John O’Donnell and Ilona Wissenbach

BRUSSELS, March 1 (Reuters) – Germany has taken steps to identify speculators in Greek debt to try to prevent them from profiting unduly from any bailout of the ailing euro zone economy, a source with direct knowledge of the matter told Reuters.

The probe by the country’s financial watchdog is part of delicate deliberations in Germany as to whether it should help bail out Greece, which is grappling with mounting debts.

“It would be bad if it were to emerge after a rescue that the money had gone into the pockets of speculators,” the source told Reuters.

“The result of the ‘Greek tragedy’ is that the political environment has become such that the Credit Default Swap (debt insurance) problem has come to the fore.”

The investigation by financial watchdog BaFin comes against a backdrop of concern over Greece’s ability to manage its finances, and sends a warning signal to speculators buying and selling insurance for Greek debt — a trading strategy that is legal but has been blamed for fuelling volatility.

However, the market for this type of betting is opaque and the German probe has so far failed to identify to what extent speculators are responsible for Greek debt price swings.

Political pressure is growing to ban hedge funds and others from such investing, which policymakers fear ultimately makes it more expensive for Greece to borrow.

French finance minister Christine Lagarde recently called for the outlawing of derivatives on government debt, such as the insurance against default, which can be bought and sold regardless of whether the investor owns the bonds in question.

Last month, newspapers reported that Greece’s intelligence service had identified British and U.S. firms as aggressive sellers of Greek bonds.

But the German investigation by Bonn-based officials at BaFin has had little success in shining a light on the largely unregulated market.

The investigation involved contact with the New York-based Depository Trust and Clearing Corporation, which records transactions such as the buying and selling of Credit Default Swaps.

“This market is not transparent and it is very hard to see what’s going on,” said the source. “It is not possible to make it transparent in just a matter of days.

“We cannot find any evidence that Greece is being shorted out of existence,” he said. “Equally, you cannot prove the opposite.”

Germany is weighing carefully whether it should help rescue Greece, a move that would be unpopular at home but could be necessary to avert a crisis in the euro zone.

Its backing is crucial because as the largest economy in Europe, it would foot the lion’s share of any rescue.

While publicly Chancellor Angela Merkel has insisted that Athens solve its problems and there has been anger over Greek comments about unsettled war claims dating back to the Nazi occupation, privately, officials say they have an emergency plan. (Editing by John Stonestreet) ((Reporting by John O’Donnell and Ilona Wissenbach, +32 2 287 6817 or +32 473 92 48 90; john.odonnell@thomsonreuters.com))

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