EU talks tough on credit default swaps trading

European ministers today dramatically ratcheted up the rhetoric in favour of banning the market in sovereign credit default swaps — a financial product some blame for the debt crises of countries such as Greece and Portugal.

CDSs are in effective insurance policies which pay out in the event of a country defaulting on its debts.

Critics say they were used by speculators to profit from, and worsen, instability in economically weak countries.

Greek prime minister George Papandreou said he had written to US President Barack Obama jointly with Germany's Angela Merkel, French President Nicolas Sarkozy and Eurogroup chairman Jean-Claude Juncker asking for a debate on whether the market in credit default swaps should be closed.

European Union Commissioner Michel Barnier meanwhile said regulators want to bring in far greater transparency to the CDS market.

"We intend to deal with this matter very severely," he said. "These people don't like to come out in the light of day. We are going to flood them with light."

Papandreou criticised financial markets for overreacting to Greek's debt crisis and accused speculators of helping to provoke panic.

His call to consider closing the market for this insurance appeared to go further than anything demanded so far, and will probably meet stiff opposition from companies and other bond buyers who depend on it to cover their risk.

Papandreou was speaking as European finance ministers met in Brussels to sign off tougher controls for the hedge fund and private equity industries.