U.S. Warns EU: Derivatives Ban Won't Work

Europe's threat to ban the sort of financial derivatives trading that some blame for worsening Greece's debt crisis wouldn't work, a senior U.S. official told EU lawmakers Tuesday.

German, French and Greek leaders have called on the EU's executive to crack down on so-called naked credit default swaps, where an investor can profit by taking out insurance on a product he doesn't own. Their call is a swipe at traders taking bets on a falling euro and a Greek default.

Greece's prime minister George Papandreou has blamed financial markets for intensifying his country's debt crisis by hiking borrowing costs. He described the swaps as buying insurance on a neighbor's house and then burning it down to collect.

Gary Gensler, the chairman of the U.S. Commodity Futures Trading Commission, said an outright ban would be "difficult to police" and would only encourage traders to seek other high risk and high return investments.

"I'm personally not sure how an outright ban would work mechanically," he told the European Parliament's economy committee. "Practically speaking these risks would find other ways to be expressed in securities or expressed elsewhere."

European diplomats speaking on condition of anonymity have conceded that a ban might be counterproductive — but say they want the European Commission to probe possible problems and legislate if necessary.

EU Financial Services Commissioner Michel Barnier said Tuesday that he would propose in June "a very important legislative package on regulation, supervision and transparency for all derivatives."

He said Europe was keen to work with the U.S. "without there being any pressure on either side" — a complaint about last week's letter from U.S. Treasury Secretary Tim Geithner warning the EU on its draft hedge fund rules.

Gensler said the U.S. planned to crack down on derivatives by increasing transparency in the market — including requiring all over-the-counter derivatives to be settled through a central clearing house.

He also said American plans to set higher capital requirements for derivatives would have prevented Greece from using currency swaps to hide debt before it joined the euro in 2001.

It would have had to put up an estimated $1 billion in collateral instead of hiding the loan in a complex financial deal set up by U.S. investment bank Goldman Sachs.

The bank swapped dollar and yen debt for euros in 2000, reducing Greece's reported public debt by euro2.37 billion or from 105.3 percent of gross domestic product to 103.7 percent — still way above the EU's 60 percent limit.

Goldman Sachs says their impact was minimal and within the rules. Greece also insists that the swaps were legal within EU rules when they were used.