Governments seek scapegoats for euro woes

Mar 12, 2010

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Talk about blaming the messenger, says Tim Price of PFP Wealth Management. Whenever markets "highlight" unwelcome truths, such as Greece's budget mess and the strains inherent in European monetary union, hedge funds and 'speculators' are "a welcome distraction".

Some Europeans say that the credit default swaps (CDS) market, where investors buy insurance against debt defaults, undermined Greek bonds. The US Department of Justice is probing supposed hedge-fund collusion to drive down the euro.  

In reality, hedge funds would be "crazy" to target the euro, note Christopher Swann and Richard Beales on Breakingviews. The currency market turns over $2trn a day and the dollar-euro trade $1trn. Even working together, hedge funds "couldn't hope to manipulate it". The sovereign CDS market is relatively opaque, so big players can move prices, says Lex in the FT, but it's a "sideshow" to the more liquid bond markets.

Trading volumes are 2%-12% of government bond trading volumes. Contracts on the likes of Greece and Portugal are worth just 1%-5% of outstanding government debt. Nor does the sovereign CDS market affect the cost of issuing new debt. The facts crush conspiracy theories.

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