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EU Says CDS Trades Didn’t Raise Euro Yields, Dagblad Reports

Borrowing costs for euro-region countries like Greece haven’t risen as a result of trading of credit-default swaps, the European Commission said, according to a report in Dutch newspaper Het Financieele Dagblad.

“The CDS spreads for the more troubled countries seem to be low relative to the corresponding bond yield spreads, which implies that CDS spreads can hardly be considered to cause the high bond yields for these countries,” the commission was quoted as saying today after the newspaper requested public access to the document. Commission officials weren’t available to comment on the report.

French President Nicolas Sarkozy and German Chancellor Angela Merkel called on the commission in June to speed up curbs on financial speculation, saying some bets against government bonds should be banned amid a resurgence of “strong volatility.”

In March, European finance ministers asked the commission to investigate the functioning of the “CDS market in general and the Greek market in particular,” according to the document written by the EU’s legislative arm.

“The results show there’s no obvious mispricing in the sovereign bond and CDS markets,” the commission wrote in the report, which was completed at the end of May.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A basis point on a contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

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