Speculators seen increasing Greek borrowing costs

Thu Mar 18, 2010 11:36am EDT

* EU politician: CDS speculation should be limited or banned

* CFTC's Gensler says 'good relationship' with EC * Hedge fund regulation agreement seen in summer

By Laurence Fletcher LONDON, March 18 (Reuters) - Hedge fund speculators have cost debt-laden Greece at least an extra 2.5 percentage points to borrow money, said one European politician who is pushing for a clampdown on bets that a country can't pay back its debts.

Poul Nyrup Rasmussen, president of the party of European Socialists and a major supporter of tough hedge fund regulation, said speculative use of credit default swaps (CDS) -- which insure against debt default and are blamed by some for exacerbating Greece's debt crisis -- should be limited or banned.

His comments come amid signs of potential disagreement between the European Commission, which has said it will consider banning the sale of CDS to buyers of protection who don't own the underlying bond, and the U.S. Commodity Futures Trading Commission (CFTC), which does not support a ban. [ID:nLDE62F0NI] [ID:nLDE62G0Q2]

"I would say that Greece is probably paying at least 2.5 percent more in interest rates than they should do without hedge fund speculation through credit default swaps," Rasmussen told a conference in London organised by Chatham House.

"And who's gaining on that speculation on credit default swaps? Not Greece, not Germany... Europe needs to have a better answer than just leaving it up to Greece to go up to the IMF."

He said Greece should instead be given an EU loan on "clear conditions" and pay a spread over German Bunds.

"We cannot live with it (hedge fund speculation on CDS) anymore, we need to go into it and we need to regulate it in one way or another, either totally forbidding doing it or another way of limiting it," he said.

This month Germany's financial watchdog BaFin said it had found nothing to prove widespread speculation in Greek bonds. [ID:nWEB4460]

"ANOTHER WORLD"

U.S. CFTC chairman Gary Gensler, who earlier this week questioned how an outright ban on CDS speculation would work, told the same conference there was "surprisingly remarkable consistency" in the proposals by different countries.

"I had a very good meeting with (European) Commissioner (Michel) Barnier on Monday," he said. "We have a very clear working relationship and a good relationship where we're trying to find the best way through on all of these matters. I look forward to whatever proposals he would be bringing forward." Rasmussen also said an agreement on the EU's controversial hedge fund directive, which proposes controls on leverage and where funds can be sold, was likely to be ready by the summer and that the compromise proposed looked "fair", after talks stalled this week after objections from Britain. [ID:nLDE62F0J0]

German Chancellor Angela Merkel said on Wednesday it was important to win Britain's backing on the rules. [ID:nLDE62G28U]

Rasmussen also said stiffer regulation was inevitable, after a few people in the group of about 100 bankers, financial executives and journalists questioned whether proposed rules would be beneficial to the economy.

"When I listen to you it's like you're living in another world. Have you heard about the recession? Do you know we have lost 7 million jobs in Europe?" he said.

"Thanks to society you're still sitting here, they are the ones who are bailing out the banks, and you're still insisting that you should have your bonuses on taxpayers' money... Start by recognizing that you have had co-responsibility." (Additional reporting by Jane Baird, editing by Antonia van de Velde) (To read the Reuters Funds Blog click on blogs.reuters.com/fundshub; for the Global Investing Blog click here)

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