Business World

Thursday 22 March 2018

EU to scrutinise government-bond insurance market

Joe Brennan

Banks and regulators from across Europe have been summoned by the European Commission to discuss regulation of the massive market for insuring against government bonds defaulting.

Brussels said it would hold a meeting "shortly" on the so-called credit default swaps (CDS) market, which is largely unregulated.

CDS pricing mechanisms and links to the sovereign bond market will be the focus of the meeting which could take place tomorrow.

Ireland saw its one CDS spreads soar to record levels early last year as hedge funds placed multi-million bets on the country defaulting on its borrowings as traders weighed up the State's exposure to the banking system.

CDS spreads on Irish government bonds soared to 386 basis points, or 3.86pc in February last year -- meaning it was costing buyers of the insurance $386,000 (€281,000) a year to protect $10m (€7.3m) of debt for five years. The rate has subsequently fallen to 127 basis points.

While the CDS market is plagued by illiquidity and speculative trading, it continues to be a keenly followed gauge of sentiment about the credit worthiness of companies and countries.

Lawmakers are facing growing calls to regulate the products in the wake of the Greek debt crisis.

Michel Barnier, the European Union's financial services commissioner, said yesterday that the EU would probe sovereign CDS trading. Adair Turner, head of the UK's Financial Service Authority, questioned the usefulness of the products this week while testifying before a parliamentary committee.

CDSs on Greek bonds fell to the lowest in seven weeks on speculation government plans for extra deficit cuts will calm the sovereign debt market. Commission President Jose Barroso said Greece's deficit-reduction programme "is now on track" after Greece pledged an additional €4.8bn of budget cuts.

Speculation using naked CDS, where investors take out insurance on bonds they don't own, may "be very destabilising," with "costs much greater than the benefits", Nobel laureate Joseph Stiglitz said yesterday.

Mr Barnier said yesterday that the commission's investigation "is not something we're doing alone. The Americans are doing the same".

The US Department of Justice is asking hedge funds not to destroy trading records on euro bets. (Additional reporting, Bloomberg)

Irish Independent

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