Greek leaders' overtures for far tougher curbs on credit default swaps fell largely on deaf ears in Washington, but they will go back to Athens with some sage advice from local policy wonks: look in the mirror and do not blame market messengers for your debt woes.
"It's fairly common for finance ministers and political leaders under threat to blame speculators. But sometimes the speculators are right," said Edwin Truman, a former US Treasury and Federal Reserve international finance official. For a second day this week, Greek Prime Minister George Papandreou and his finance minister George Papaconstantinou urged backing for tougher rules for credit default swaps and a ban on some activities such as "naked" short-selling of sovereign debt or trading "naked" credit default swaps (CDS) without owning the underlying bonds.
Hedge funds have been accused of aggravating Greece's debt crisis by using such trading activities to bet on a government default.
Credit default swaps have been condemned by many US lawmakers because of the $62.5 billion (Dh229.5bn) taxpayers handed global banks to unwind CDS contracts written by bailed-out insurer American International Group. But any outright ban is highly unlikely.
The trading of CDS on Greece's sovereign debt – essentially an insurance policy against a default – provided a valuable market signal about worrisome policies, said Douglas Elliott, a senior fellow at the Brookings Institution in Washington and a former JPMorgan investment banker.
"The Greek bond market could directly deliver the same bad news by itself and Greek bond yields would widen," he said. "The CDS gives you one more pretty liquid way of delivering the signal from the markets. Just because you don't like the signal, you shouldn't blame the messenger," said Elliott. The Obama administration said it would prefer to stay on its own course for reforming derivatives markets by making them more transparent and raising capital requirements.
CDS and other standardised derivatives contracts would be moved away from opaque over-the-counter trades onto exchanges or sold through central clearing houses under reform plans backed by the White House that are stalled in Congress.
An administration official also said regulators will get enhanced tools to crack down on market manipulation and abuse through position limits and tougher prudential requirements.
"But the central task before the Greek Government is to continue to move forward on their plans to restore fiscal stability and growth to its economy," said the official.