Germany and France call on a ban on speculative trading in CDS

 

The momentum for a ban on naked CDS is getting stronger. Germany and France on Wednesday called on the European Union to consider banning speculative trading in credit default swaps and set up a compulsory register of derivatives trading, the FT reports. Angela Merkel and Francois Fillon sent a letter to Jose Barroso yesterday, asking for an immediate investigation of the role and effect of speculative trading in CDSs in the sovereign bonds of European Union member states. Fillon assured after talks in Berlin, that both governments are “very much in agreement in tackling extreme speculation”.

Earlier this week, Mario Draghi indicated that tighter regulation of CDS could become a G20 issue when he confirmed that the subject will be on the agenda of the Financial Stability Board (FSB), Reuters reports.

An FT editorial says that the proposal  has the purpose to “deflect attention from their inability to deal with the Greek debt crisis” and does “nothing to solve the crisis or make future ones less likely”. But banning naked CDS would be “silly”.

Bloomberg reports that Merrill Lynch and INvesco warn investors to avoid Spain’s bonds as the euro region’s highest levels of joblessness stifle the country’s ability to cut its budget deficit.

 

 

Geithner warns EU of regulatory rift

The US has warned the EU Commission that plans to regulate hedge funds and private equity companies would cause a transatlantic rift because they discriminated against US groups. The FT reports that diplomats in Brussels are edging towards a final agreement on a legislation that is likely to impose tough conditions on the industry. A British minister told industry representatives he would fight for the free movement of capital, but warned they would not get the directive they wanted.

 

The French position  towards the EMF

Jean Quatremer has some details about the French reaction to the EMF. It has caused Paris by surprised, and the media reaction was most sceptical. Christine Lagarde said diplomatically that it was an interesting idea, but not a priority right now, while the Elysee is more positive. The main problem for Sarkozy is that it was not his idea.

 

The Greeks are expecting a long recession

The Wall Street Journal reports of a poll in the To Vima newspaper, according to which 37.9% of Greeks expect the recession to last three to four years. Another 19.3% think it could last five to nine years, and 22.4% think it could take a decade or longer for Greece to emerge from recession. Only a small minority, 15.4%, reckon that a recovery will come in the next year or two, the poll showed.

In Greece, trade unions will shut down hospitals, airports and schools today in Greece’s second general strike this month to protest Prime Minister George Papandreou’s latest round of budget cuts, Bloomberg reports. The unions consider the measures as unjust, as they are demanding sacrifices from workers more than from employers, businessmen and bankers that created the crisis.

 

 

How Spain can avoid being Greece

Luis Garicano has an editorial in the FT, in which he said that Spain has the means to avoid the Greek fate as long as carries out three specific reforms. The first are financial reforms, especially a consolidation of the undercapitalised cajas, the second is budgetary reform, a return to sustainability, and finally, significant structural reform, in the labour market in particular. The most important task is to end the dual labour market.

 

Credit markets return to average

This is a little technical but interesting. John Authers reports of a Deutsche Bank research, according to which credit is now trading at average historical levels. “Deutsche finds the historical rate at which different classes of bonds have defaulted and assumes that this is the default rate they will suffer in future. They can then work out the “spread”, or extra yield, that these bonds would have to pay so that they would, given the average default rate, pay out as much as a government bond.”

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