March 1, 2010 / 2:17 PM / in 9 years

UPDATE 2-Germany moves to out Greek debt speculators-source

* Financial watchdog BaFin attempts to identify debt bettors

* Probe sharpens German debate about helping Greece

* Berlin fears a rescue could give windfalls to speculators

(Adds background, detail)

By John O’Donnell and Ilona Wissenbach

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

The initiative 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. [ID:nLDE6200TF]

“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 worries over Greece’s future. It sends a warning to those trading insurance for Greek debt which, while legal, has been blamed for fuelling volatility - though it has so far failed to identify to what extent speculators are behind Greek debt price swings.

News of the German probe added to market uncertainty over Greece. Having started the day around $1.36, the euro EUR= slipped to $1.3483 by 1549 GMT.

MORAL RESPONSIBILITY

The German 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 be first in line to provide funding for any rescue.

While publicly Chancellor Angela Merkel has insisted that Athens solve its own problems and there has been anger over Greek comments about war claims dating back to the Nazi occupation, privately German officials say they have an emergency plan.

“There is a moral responsibility on Germany (to help Greece) given European history and they know it,” said Olle Schmidt, a European liberal parliamentarian. “Together with others, they will be obliged to help.”

The Swede, a prominent member of the parliamentary group overseeing tougher new rules for hedge funds and banks, said that banning short-selling and other investment strategies would do little to solve Greek problems.

“In the Swedish financial crisis, we considered banning this and that. But the only way forward was to change our economy and that is exactly what Greece will have to do.”

Political pressure is growing to ban hedge funds and others from investing in derivatives of a government’s debt, which policymakers fear ultimately makes it more expensive for that country to borrow.

Many believe that allowing hedge funds to buy insurance against the default of a government bond they do not own creates incentives to manipulate the market. French finance minister Christine Lagarde has called for the outlawing of such trading.

(Editing by John Stonestreet)

+32 2 287 6817 or +32 473 92 48 90; john.odonnell@thomsonreuters.com

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