Germany has moved to identify speculators in Greek debt to try to prevent them from profiting from any bailout of the euro zone country's ailing economy, a source with direct knowledge of the matter told Reuters on Monday.
The initiative by the country's financial watchdog is part of delicate deliberations in Germany as to whether it should help bail out Greece, which is grappling with mounting debts.
"It would be bad if it were to emerge after a rescue that the money had gone into the pockets of speculators," the source told Reuters.
He said the "Greek tragedy" had pushed the issue of betting on government bonds high up the political agenda. Although legal, this trading strategy has been blamed for fueling market volatility that makes it harder for Greece to borrow.
European political leaders, as they consider how best to help Greece, are keen to deter hedge funds and other speculators from exacerbating Greek's problems by betting on the cost of insuring or buying the country's debt.
Earlier on Monday, Jean-Claude Juncker, who heads the Eurogroup of finance ministers, warned of "torture equipment" which could be used against such speculators.
"If the Greeks hold on to the strict parameters and the markets continue to speculate against Greece, we will not let them just march through," he said.
Paul Rasmussen, president of the party of European Socialists, said: "It would be completely unacceptable that financial speculators drive up the price of borrowing by a country in crisis like Greece."
The German probe sends a warning in particular to those trading insurance or credit default swaps for Greek debt, although investigators have so far failed to identify to what extent speculators are behind Greek debt price swings.
Many banks, said the source, told officials they had quit such betting for fear of being singled out by governments.
The spotlight moved to this once inconspicuous market after newspapers reported that Greece's intelligence services had identified U.S. and British firms as aggressive sellers of Greek bonds.
The German investigation involved contact with the New York-based Depository Trust and Clearing Corporation, which records transactions such as the buying and selling of credit default swaps.
"This market is not transparent and it is very hard to see what's going on," said the source. "It is not possible to make it transparent in just a matter of days."
"We cannot find any evidence that Greece is being shorted out of existence," he said. "Equally, you cannot prove the opposite."
Germany is weighing carefully whether it should help rescue Greece, a move that would be very unpopular at home but could be necessary to avert a crisis in the euro zone.
Publicly Chancellor Angela Merkel has insisted Athens solve its own problems, and there has been anger over Greek comments about war claims dating back to the Nazi occupation, but privately German officials say they have an emergency plan.
Berlin is worried about the political fallout, however, should it emerge that a rescue indirectly handed a windfall to speculators.
German backing is crucial because, as the largest economy in Europe, it would be first in line to provide funding.
"There is a moral responsibility on Germany (to help Greece) given European history and they know it," said Olle Schmidt, a European liberal parliamentarian. "Together with others, they will be obliged to help."
Political pressure is growing to curb hedge funds and others. Many believe that allowing them buy insurance against the default of a government bond they do not own creates incentives to manipulate the market.
French finance minister Christine Lagarde has called for the outlawing of such trading.
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