David Prosser: Scapegoats required for financial crisis

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The Independent Online

Outlook It is the favoured lament of Treasury ministers the world over in times of financial difficulty: those awful speculators are conspiring against us. So it is that appetite across the European Union is growing for a crackdown on the evil hedge funds who brought Greece to its knees and provoked a crisis of confidence in the euro itself.

Specifically, Michel Barnier, the new internal market commissioner, wants to ban "speculators" from using credit default swaps (CDSs) on sovereign debt. CDSs provide insurance in the event of a default on a debt – Government bonds in this case – and the EU says hedge funds have taken huge CDS positions, even though they do not hold Greek debt, in the hope of forcing a default and cashing in on it.

It is true that the price of CDSs gives an indication of the market's view about the likelihood of a default. So when Greek CDS prices began signalling heightened concern about the country's borrowing, bond investors got nervous. Taking this link to its logical conclusion, the CDS market might eventually make investors so anxious that they stop lending to Greece, triggering a default on existing debt and a big payday for CDS holders.

Where the theory falls, however, is that in the case of Greece there aren't enough CDSs to do the job – the total number of contracts in issue is worth around one-fiftieth of the value of Greek sovereign debt. The speculators, in other words, are miles off having the firepower they need to blow up the country.

Still, why let the facts get in the way of the argument? If you've mismanaged an economy to the extent that the Greeks have – or if you're worried about the future of the euro – much easier to blame faceless speculators than to look a little closer to home for the causes of your woes.

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