There is certainly a case to be made for treating a credit default swap more like an insurance contract (namely that you can only buy one if you hold the asset — the bond, in this case — that is being insured). There’s an even better case to be made for centralized trading of such instruments, but this Reuters report (extract below) underlines the way that the Greek crisis is being used by Brussels to enhance its own power.

(Reuters) – The European Commission said on Tuesday it will consider banning the naked selling of derivatives contracts some EU politicians say were used by speculators to bet on a Greek bond default. Commission President Jose Manuel Barroso also said the European Union’s executive would like the G20 group of developed and developing nations to discuss speculation in credit default swaps (CDS), a form of insurance against default.
Naked selling involves selling a CDS to a buyer who does not hold the underlying sovereign bond. A naked CDS contract is typically a bet taken by investment firms like hedge funds that the bond will end up on the rocks.”A new, ad hoc reflection is needed on credit default swaps regarding sovereign debt,” Barroso said. “In this context, the Commission will examine closely the relevance of banning purely speculative naked sales on credit default swaps of sovereign debt,” he said. EU finance ministers and the Commission are expected to discuss ways to dampen speculation on sovereign credit default swap markets at a meeting on March 16.

There’s another important point too. The Greek crisis owes next to nothing to speculation in CDS and everything to the way that Greece’s finances have been run over the last few years and to the way that those finances were, uh, “presented,” a fact that makes the Greek prime minister’s calls for greater transparency of the CDS market somewhat ironic.

But much of what Greece was doing appears to have been an open secret. The question remains. When did Germany’s chancellor, Angela Merkel, self-proclaimed (if bogus) defender of the German taxpayer, know about this charade? And what did she do to bring it to an end? To ask the question is to answer it.

H/t: Clusterstock.