Greece seeks U.S. help regulating speculators

By Anthony Faiola and Steven Mufson
Washington Post Staff Writers
Tuesday, March 9, 2010; A12

Greek Prime Minister George Papandreou will seek President Obama's support at the White House on Tuesday for a European campaign to crack down on global financial speculation that critics say has exacerbated Europe's worst debt crisis in decades.

The U.S.-born Papandreou, who assumed Greece's highest office in October, is pushing a plan in Europe that would impose new limits and stricter monitoring on complex and largely unregulated financial bets. Officials in Europe have blamed investors for manipulating the price of Greek bonds, fueling higher borrowing rates across Europe and accelerating the euro's fall against the dollar and other currencies.

"Together with my European partners, we have taken a common initiative to strengthen financial regulation, particularly vis-á-vis speculation," Papandreou said Monday at the Brookings Institution, where he urged the United States to join in "decisive and collective action."

In arriving in Washington, Papandreou left behind massive labor strikes and other turmoil sparked by his effort to slash the government's budget deficit from 12.7 to 8 percent of gross domestic product. Many investors who bet against Greece, by contrast, are profiting.

"The same financial institutions that were bailed out with taxpayers' money are now making a fortune from Greece's misfortune," the prime minister said. "Europe and America must say 'enough is enough' to these speculators who only place value on immediate returns, with utter disregard for the consequences on the larger economic system -- not to mention the human consequences of lost jobs, foreclosed homes and decimated pensions."

The campaign to regulate opaque financial devices dates to the collapse of Lehman Brothers in September 2008. While the Greek crisis has recently added new urgency to the drive, it remains unclear whether American officials will take concrete action. Unlike in past currency crises in Asia and Mexico, during which U.S. and International Monetary Fund officials played leading roles, the Greek debt crisis has been handled almost entirely by European leaders.

"Europe is jealously guarding the front seat here, even to the extent of resisting the traditional involvement of the IMF," said Mohamed El-Erian, chief executive of bond investment giant Pimco and a former IMF official.

Europeans vow to help

In recent days, Germany and France have vowed to pursue fresh regulations in Europe. A European official familiar with the plan said that officials are considering curbs on transactions such as "naked" credit default swaps, which allow speculators to bet on the value of bonds they don't actually hold.

U.S. and European regulators are already probing deals involving Greek government bonds and the euro by hedge funds and other institutions. The U.S. Justice Department has ordered several big U.S. hedge funds to retain records of recent trades of the euro to check for irregularities.

After meeting with Papandreou on Friday, German Chancellor Angela Merkel forcefully backed new rules against speculation and called for U.S. cooperation. Her calls were echoed by French President Nicolas Sarkozy after his Saturday meeting with Papandreou.

"We must succeed at putting a stop to the speculators' game with sovereign states," Merkel told reporters in Berlin on Friday. "Credit default swaps, where you insure your neighbor's house just to destroy it and make money from it, that's exactly what we have to curb."

Yet many observers have argued that investors merely have been differentiating between those nations that are good risks and those that are not.

Greece's problems, critics argue, have more to do with erroneous economic data, a broken tax system and runaway government spending. Papandreou makes no apologies for his nation's predicament; he said Monday that the deficit is twice as big as estimated and that tax evasion is so widespread that fewer than 5,000 Greeks declare incomes equal to $136,000 at recent exchange rates. Similar problems in other European nations, analysts say, have made the region's currency vulnerable to credit default swaps and short sellers.

El-Erian wrote in an e-mail that "while not major drivers, these instruments can amplify the impact of fundamental dislocations in economic and financial conditions occasioned by high budget deficits and a rapidly ballooning debt stock."

John Chambers, chairman of the sovereign rating committee at Standard & Poor's, said, "I think that the problems with Greek public finances are specific to Greek public finances."

"The concern over speculation is obscuring the underlying issue that Greece and other nations have very precarious fiscal positions," said Simon Tilford, chief economist at the Center for European Reform.

Monitoring finances

European governments are scrambling to come up with a plan for a European Monetary Fund that could monitor national finances and step in to shore up financially besieged members of the 16-nation bloc that uses the euro. When Asian countries proposed such a fund after their 1997 financial crisis, U.S. officials opposed the plan, but the Obama administration is not expected to object to Europe's proposal.

Creating such an agency, however, could take months. Greece must raise more than $30 billion by the end of May to keep the government operating.

Papandreou said he would not seek financial aid from Obama on Tuesday. A Greek official called the nation's debt problem "strictly a European issue."

In fact, there have been some grumblings in Europe that Papandreou, known as "the American," is in the United States at all.

Faiola reported from London. Correspondent Edward Cody in Paris contributed to this report.