Greece's Crisis Smoke Screen

Article excerpt

Byline: Barrett Sheridan

Greek Prime Minister George Papandreou claims to have discovered the culprit behind his country's economic misery, and last week he laid out his indictment. In a speech in D.C., he blamed hedge funds and other speculators for driving up the borrowing costs of his cash-strapped nation. In particular, credit default swaps--financial derivatives that act like insurance for bondholders--are a "scourge that haunts Greece and all of us," he said. By mid-week, German Chancellor Angela Merkel and French President Nicolas Sarkozy took up the baton and published a letter urging the European Commission to consider a ban on CDS speculation.

But if Europe curtails the use of these and other derivatives, it will hurt, not help, the continent's sickly economies. To start, there is simply no evidence that swaps were really to blame for the Greek crisis. The German financial regulator, BaFin, said as much when it released a report on Greek credit default swaps last week. It turns out the volume of activity in the Greek swaps market stayed constant at about $9 billion since mid-January. If there had been any meaningful speculation going on, that number would have spiked. …