Greek PM calls for crackdown on speculators

Americans asked to help Europe regulate the 'scourge' of credit-default swapsGreek Prime Minister George Papandreou will press United States President Barack Obama to help Europe combat "unprincipled speculators" who he says have caused upheaval in financial markets and threaten a new global crisis.

"Europe and America must say 'enough is enough' to those speculators who only place value on immediate returns, with utter disregard for the consequences on the larger economic system," he said in Washington.

Papandreou, who is struggling to convince investors his Government is serious about taming Europe's biggest budget deficit, was to meet Obama and Treasury Secretary Timothy Geithner in his first US visit since being elected in October.

"If the European crisis metastasises, it could create a new global financial crisis with implications as grave as the US-originated crisis two years ago," Papandreou said.

He and other European leaders such as French President Nicolas Sarkozy have blamed speculators for much of the surge in Greek financing costs, rather Greece's budget gap of more than four times the European Union limit.

Officials in Berlin and Brussels said yesterday that Germany and France were pushing for curbs on "speculators" who use derivatives to bet against Greek debt,

Papandreou singled out credit-default swaps as particularly disruptive, saying their use to protect against a Greek default was the equivalent of allowing someone to buy fire insurance on a neighbour's house and then burning it down to collect.

The swaps were a "scourge" that "haunts Greece and all of us", Papandreou said.

US and European regulators needed to bolster regulations to curtain such activities, or "a small problem could be the tipping point in an already volatile system".

Some European regulators questioned the charges that "speculators" were behind the slump in Greek bonds. The German BaFin financial services regulator said yesterday that there was "so far no evidence" of "massive" speculation in credit default swaps against Greek bonds.

EU leaders are also backing the creation of a lender of last resort that could come to a member's aid the way the International Monetary Fund helps Governments struggling to finance their deficits.

"Our instruments are not sufficient," German leader Angela Merkel said in Berlin. "The EU must be able to respond to the challenges of the moment."

The risk premium to buy Greek 10-year bonds instead of comparable German debt, the European benchmark, has more than doubled since November 10.

"Greece currently has to borrow at rates almost twice as high as other EU countries," Papandreou said. "So when we borrow €5 billion [$9.7 billion] for five years, we must pay about €725 million more in interest than Germany does."

To try to convince the EU and investors that Greece was serious about trimming a deficit of 12.7 per cent of gross domestic product, Papandreou last week announced a package of tax increases and spending cuts that helped the Government sell €5 billion of bonds the next day. Greece faces more than €20 billion in debt redemptions in April and May.

"We support the steps Greece is taking," said US Secretary of State Hillary Clinton after meeting Papandreou. "We commend the Prime Minister and his Government for moving quickly to put in place the changes that are called for, given the economic consequences of the fiscal situation he inherited."

Papandreou said Greece might have a "hard time" carrying out its austerity plan if improvements were "swallowed up by prohibitive interest rates". The measures have triggered widespread strikes that have disrupted transport and public services and led to clashes in Athens.

- BLOOMBERG