Merkel Urges Regulation as Greece Takes Plea to U.S. (Update1)
March 09, 2010, 8:37 AM EST(Adds European fund proposal from seventh paragraph, EU’s Rehn in 13th. For more on the Greek crisis, see EXT3 <GO>.)
By Rainer Buergin and Shobhana Chandra
March 9 (Bloomberg) -- German Chancellor Angela Merkel and Luxembourg Prime Minister Jean-Claude Juncker called for urgent regulation of credit-default swaps to shore up the euro area and prevent a rerun of the Greek financial crisis.
Merkel, speaking to reporters in Luxembourg today before Greek Prime Minister George Papandreou meets President Barack Obama in Washington, said the European Union must take the lead in curbing the “very speculative elements” of derivatives trading, going beyond previous Group of 20 nations agreements. The U.S. must also be on board, she said.
“We’re of the opinion that a quick implementation of actions in the area of CDS has to happen,” Merkel said. Citing “ongoing speculation against euro-region countries,” she called for the “fastest possible” implementation of new rules. Europe must “do everything to avoid unhealthy speculation,” said Juncker, who heads the euro-area finance ministers group.
European leaders are ratcheting up the pressure for tighter global regulation of derivatives as they seek to learn the lessons of the Greek fiscal crisis. Papandreou will press Obama today to help combat the “unprincipled speculators” he said threaten a new global financial crisis.
“Europe and America must say ‘enough is enough’ to those speculators who only place value on immediate returns, with utter disregard for the consequences on the larger economic system,” Papandreou said yesterday in a speech in Washington.
Ballooning Deficits
Merkel and French President Nicolas Sarkozy are turning to regulatory efforts to help tame the surge in Greek financing costs. Greece’s budget gap, at 12.7 percent of gross domestic product, is the EU’s biggest and more than four times EU limits.
Papandreou’s government last week outlined measures to save 4.8 billion euros ($6.5 billion), including higher fuel, tobacco and sales taxes, as it seeks to lop 4 percentage points off the budget deficit.
Greece is “on track” to achieve its deficit-cutting goals following the passage of extra austerity measures, EU Economic and Monetary Affairs Commissioner Olli Rehn said today in an interview in Strasbourg, France. The new measures put Greece “onto the path of fiscal adjustment for 2012 below 3 percent” of GDP, he said.
The difference in yield, or spread, between the 10-year Greek bond and its German equivalent, the bund, rose 1 basis point to 307 basis points as of 12:42 p.m. in London.
Fund Disagreement
As Papandreou pushes ahead with deficit-cutting plans that set off protests in Greece, European leaders may be headed for a split over a proposal to set up a lender of last resort to bolster fiscally distressed euro-area countries.
Merkel, whose finance minister Wolfgang Schaeuble champions the idea of a European Monetary Fund, said it would work as “a measure of last resort” and only after “a cascade of sanctions” against governments that break euro rules. A change of European treaties would be required, she said.
French Finance Minister Christine Lagarde said an EMF may not be the best option. “Other ideas need to be studied and those that respect the Lisbon treaty are much preferable,” she said in Paris. Juncker said any such fund shouldn’t create an opening “for countries that don’t take budgetary discipline so seriously.”
Bundesbank President Axel Weber, a European Central Bank board member, also questioned the EMF proposal. At the same time, he said he sees the need for more transparency in the credit-default-swap market.
‘Underlying Exposure’
“The CDS market has developed very strongly and drives prices in bond markets,” Weber told reporters in Frankfurt. “Not everybody who buys protection has an underlying exposure. It’s a very intransparent market, we need to have a much more transparency.”
While European leaders seek ways to limit credit-default swaps, Germany’s BaFin financial regulator said market data lack evidence that the instruments were used to speculate against Greek bonds.
Data provided by the U.S. Depository Trust & Clearing Corporation didn’t show that new open positions were built up and also doesn’t indicate “massive speculative action,” BaFin said in a statement yesterday.
--With assistance from Tony Czuczka in Berlin, Stephanie Bodoni in Luxembourg, Christian Vits and Jana Randow in Frankfurt, Jonathan Stearns in Strasbourg, France, and Keith Campbell in London. Editors: Alan Crawford, James Hertling
To contact the reporters on this story: Rainer Buergin in Berlin at rbuergin1@bloomberg.net; Shobhana Chandra in Washington at schandra1@bloomberg.net
To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net
