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Don’t let facts get in the way of a good scapegoat

The appetite across the European Union (EU) is growing for a crackdown on the evil hedge funds who brought Greece to its knees and provoked a crisis of confidence in the euro.

Specifically, Michel Barnier, the new internal market commissioner, wants to ban ‘speculators’ from using credit default swaps (CDSs) on sovereign debt. CDSs provide insurance in the event of a default on a debt — government bonds in this case — and the EU says hedge funds have taken huge CDS positions, even though they do not hold Greek debt, in the hope of forcing a default and cashing in on it.

It is true the price of CDSs gives an indication of the market's view about the likelihood of a default. So when Greek CDS prices began signalling heightened concern about the country's borrowing, bond investors got nervous. The CDS market might eventually make investors so anxious they stop lending to Greece, triggering a default on existing debt and big payday for CDS holders.

Where the theory falls, however, is that in the case of Greece there aren't enough CDSs to do the job. The speculators, in other words, are miles off having the firepower they need to blow up the country. Still, why let the facts get in the way? If you've mismanaged an economy to the extent the Greeks have, it’s much easier to blame faceless speculators than to look closer to home.