ZEW Survey Among Financial Market Experts - Experts Favour Regulation of Credit Default Swaps

Speculations with credit default swaps (CDS) are suspected to have intensified the Greek debt problem. To make speculations with CDS more difficult in the future, financial market experts are in favour of stricter regulations of CDS trade. These are the findings of a survey among 268 financial market experts, conducted by the Centre for European Economic Research (ZEW) in Mannheim.

"CDS is similar to insurance. Investors can hedge themselves against the risk of default, for example, of government bonds. Speculators who buy CDS without owning the bond covered benefit if the risk of default is estimated to be high. The speculators can then sell the CDS for a higher price," says Sandra Schmidt, ZEW researcher. About 64 percent of financial market experts participating in the survey hold the opinion that CDS are specifically used to benefit from the fear of default. "Such behaviour could intensify the financial crisis in other euro countries highly in debt," Schmidt says.

At the beginning of April, when the survey was conducted, about 51 percent of experts already expected that Greece could not refinance its debts in the long run and would need financial support by other euro countries. Now this actually seems to be the case. An alternative would be Greece leaving the eurozone. However, 68 percent of experts do not consider this a good alternative. Members of the eurozone highly in debt should instead adopt strict budgetary policies, which should be surveyed by an adequate mechanism.

For further information please contact

Dr. Sandra Schmidt, E-mail: s.schmidt@zew.de