**Political momentum is growing across Europe for limits on financial speculators who have been blamed for worsening Greece’s financial woes.**German Chancellor Angela Merkel said “quick action is needed” to tackle the problem, while European Union President Jose Manuel Barroso also spoke out.
They say speculators, such as hedge funds, are unfairly betting that Greece will default on its loans.
Such moves are making it more expensive for Greece to borrow funds.
‘US must act’
The speculators are typically betting against Greece defaulting on its government bond payments - or having its credit rating lowered - by buying large quantities of a complex financial insurance instrument called a Credit Default Swap (CDS).
“The US needs to make a gesture. We think a step forward would greatly help”
Angela Merkel
The way this works is that if Greece defaults on paying interest on its bonds, or has its credit rating lowered, then the owners of CDSs linked to the bonds will be eligible for penalty payments from the bond holders - typically banks.
The knock-on effect is that Greece is having to offer higher interest on its bonds to still make them attractive for banks to buy.
Ms Merkel called on the US to also move to clamp down on such financial speculation.
“The US needs to make a gesture,” she said. “We think a step forward would greatly help.”
Mr Barroso told the European Parliament on Tuesday that the EU would look at banning “purely speculative” sales on credit default swaps of sovereign debt.
Greece’s Prime Minister George Papandreou on Monday also called for action to tackle financial speculators.
In Washington ahead of a meeting with President Obama later on Tuesday, he said Europe and America had to say “enough is enough”, and compared such speculators with arsonists.
French President Nicolas Sarkozy has also called for new rules against financial speculators.