Greek Prime Minister George Papandreou on Monday urged the Group of 20 nations to crack down on market speculators, warning that failing to do so could trigger another global financial crisis.
After meeting with Secretary of State Hillary Clinton, where he sought support for his plan, Papandreou said debt-strapped Greece cannot sustain borrowing at rates far higher than those charged to other nations.
If we continue to borrow at very high rates ... twice, for example, the rates of Germany, that would be unsustainable within a common currency, he said, referring to the 16 nations that share the euro as a currency.
Papandreou blamed speculators for Greece's woes, and warned that a fresh financial crisis could be triggered if their activities were not reined in.
An ongoing euro crisis could cause a domino effect, driving up borrowing costs for other countries with large deficits and causing volatility in bond and currency rates across the world, he said.
Greece's borrowing costs have skyrocketed in recent months, forcing the government to take tough measures to tighten its budget and pushing Papandreou to look to neighbors for help.
We're not asking for money. We're not asking for bailouts, Papandreou stressed on the first day of a four-day U.S. visit. What we're simply saying is we want to be equal partners as we've taken these measures ... to be able to get what others also can get, which is basically normal rates of borrowing.
The Greek prime minister will take his case to President Barack Obama when the two meet on Tuesday.
In a speech earlier on Monday, Papandreou called for tougher rules for credit default swaps and said the G20 rich and emerging nations should take the lead in keeping speculators in line. Credit default swaps are sold to investors to protect them from the risks of a debt default; they are also used to bet on whether a company will default on its bonds.
SPECULATORS CAUSING MISCHIEF
We need clear rules on shorts, naked shorts and credit default swaps. I hope there will be a positive response from this side of the Atlantic to bring this initiative to the G20, Papandreou said.
Critics of credit default swaps charge that speculators use the contracts to bet against countries for profit, which can lead bond yields higher and make it prohibitively expensive for debt-strapped countries like Greece to refinance their debt.
Hedge funds have been accused of aggravating the Greek debt crisis with naked short selling -- betting on a default without owning the underlying bonds.
Under current U.S. law, regulators do not have authority to regulate the $31 trillion credit default swaps market or prohibit investors from using the swaps as a speculative tool.
The Obama administration favors requiring most credit default swaps and other over-the-counter derivatives to be cleared by a central clearinghouse, which would assume the risk if one party defaults. But legislation is stalled in the U.S. Senate and it is unclear when a final bill will pass.
Ernest Patrikis, a former vice president at the New York Federal Reserve Bank and now a partner at law firm White & Case in New York, said it was unlikely the United States -- one of the main CDS trading centers -- would support curbs on the instruments.
I don't think Congress will ban credit default swaps, he said. The potential for that is not great because these products have value.
Papandreou is making the rounds of world capitals to calm worry about Greece's financial condition and persuade investors Greece is committed to getting its spending under control.
He met German Chancellor Angela Merkel on Friday and French President Nicolas Sarkozy on Sunday to press his case that Greece needs the backing of other euro-zone members to keep its crisis contained.
If the European crisis metastasizes, it could create a new global financial crisis with implications as grave as the U.S.-originated crisis two years ago, Papandreou said.
HELPING HAND FROM EUROPE
Sarkozy promised Greece that the euro zone would help it overcome its financial problems and vowed a European crackdown on speculators. The pledge helped lower Greece's borrowing costs and the price of insuring Greek debt against default.
Still, Greece has not ruled out the possibility of going to the International Monetary Fund as a last resort if it needs aid, a step that might call into question the unity of the euro zone.
While he does not have any meetings scheduled with IMF officials while in Washington, an IMF official said Greece's finance minister would have an informal meeting with the
The IMF's managing director, Dominique Strauss-Kahn, who is traveling this week in Africa, played down fears that Greece's problems would trigger crisis in other heavily indebted euro zone countries like Portugal, Ireland and Spain.
The euro zone has to deal with the Greek problem. They are doing this, Strauss-Kahn said. No one knows what's going to happen tomorrow morning, but there's no reason why the spillover to Portugal or to Spain will take place, he said in an interview in Nairobi.
Portugal on Monday announced austerity measures aimed at getting its ballooning budget deficit under control, and the European Commission said it might propose an IMF-style European Monetary Fund to cope with future debt crises in the euro single currency zone.
(Additional reporting by Ed Cropley in Nairobi, Karen Brettell in New York and Rachelle Younglai and Arshad Mohammed in Washington; Writing by Glenn Somerville; Editing by Neil Stempleman and Leslie Adler.)