UPDATE 2-EU threatens severe treatment for debt speculators

* EU’s Barnier – will deal with debt speculation severely

* Papandreou raises prospect of closing CDS insurance market

* Berlin plays down claim letter sent to Obama wanting a ban

* Experts warn a ban could spook market

By John O’Donnell and Jane Baird

BRUSSELS/LONDON, May 17 (BestGrowthStock) – The European Commission
ratcheted up pressure on speculators, promising severe treatment
for those who gamble on debt default insurance, while the Greek
prime minister raised the prospect of banning such trading.

Calls to consider closing the market for credit default
swaps go further than anything demanded so far and raise the
stakes for a summit of leaders from the Group of 20
industrialised and developing economies in June.

Michel Barnier, the European commissioner in charge of a
regulatory overhaul of financial services across the European
Union, meanwhile promised tough action against those who bet on
the market for government debt.

“We intend to deal with this matter very severely,” the
former French foreign minister, told reporters. “These people
don’t like to come out in the light of day. We are going to
flood them with light.”

Earlier, Greek Prime Minister George Papandreou told a
newspaper that he and other European leaders including German
chancellor Angela Merkel had written to ask U.S. President
Barack Obama to consider banning trade in debt default

A ban, subsequently played down in Berlin, would be opposed
by companies that buy CDS to cover risk and is unlikely to get a
green light.

Nonetheless, Papandreou’s remarks underline the political
determination to curb the market betting that some suspect
exacerbated Athens’ borrowing problems.

In an interview with German newspaper Handelsblatt,
Papandreou said: “Angela Merkel, Nicolas Sarkozy, Jean-Claude
Juncker and I have suggested in a joint letter to Barack Obama
whether the markets for credit default swaps … should not be
closed. The G20 countries want to discuss this.”

Government sources in Berlin denied that any such letter
from the German Chancellor, the French President and
Luxembourg’s Prime Minister had been sent to Washington.

EU lawmakers demand more clout for watchdogs [ID:nLDE6492KB]

Q&A-How fear of speculators drives EU leaders[ID:nLDE6480EM]

In October, the European Commission, the EU’s executive
body, will draft new rules for buying and selling credit default
swaps, part of the largely unchartered $600 trillion derivatives
market that ballooned ahead of the global financial crisis.

Diplomats are also negotiating new rules for hedge funds to
force the secretive industry into handing over swathes of
closely guarded investment information to supervisors and
putting them under the watch of a new European watchdog.

European finance ministers will meet in Brussels on Tuesday
to hammer out an agreement on tougher controls for hedge funds
and private equity.

Britain has long sought to water down those rules although
it is now possible that Germany, France and other countries will
overrule London in a vote later this year, forcing through the
stricter regime.

The political momentum does not favour Britain, which is
home to Europe’s top financial centre.

Politicians and others have repeatedly rounded on a
“wolf-pack” of speculators for exacerbating a crisis that
European leaders sought to defuse last week with a $1 trillion
aid package for its most indebted countries.

But winning back investor confidence is proving hard. The
euro hit a four-year low on Monday and gold rose after a
sell-off on Friday in European companies’ shares, credit default
swaps and some government debt.

“The problem isn’t evil speculators but your classic
long-term investors who are either taking risk off the table or
are not interested in buying as much,” said Gary Jenkins, head
of fixed income research at broker Evolution Securities.

If regulators ban the use of CDS, then the market’s aversion
to government risk will be reflected in the cash bond market,
said Mehernosh Engineer, a credit strategist at BNP Paribas.

“They are trying to mask something that’s apparent and that
was not caused by the CDS market,” he added. “(A ban) would be a
huge error. All it would do is spook the market.”
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(Additional reporting by George Georgiopoulos in Athens;
Editing by Susan Fenton)

UPDATE 2-EU threatens severe treatment for debt speculators