Le Monde published an interesting article last week on how international hedge funds are speculating with European sovereign bonds.

They are making enormous profits with the spreads and the re-evaluated nominal values. Ten-year Greek bonds are available on the (second) market at 50% of the nominal value. The interest rate for these bonds is more than 15% at the moment. As hedge funds are not investing real capital but borrowing money for their speculation they will probably get the necessary capital at a slightly higher rate than the European Central Bank rate on the current market.

Indeed, what a deal for speculators. If for example you buy one million euro worth of Greek bonds (nominal), you would have to spend €500,000 in real terms at the moment. Borrowing this amount on a rate - let us say - of 3%, will cost you €15,000 per year, or approximately €42 a day! On the other hand, you will get €150,000 in interest from the Greek treasury per year, or approximately €415 a day. So far you will have a daily profit of €373. Imagine that hedge funds are not only speculating on one million euro but perhaps on ten billion euro. Accordingly, they have a daily profit of €3,730,000!

We have to be cautious. This kind of speculation creates a new financial bubble. It seems that already a new second market is emerging similar to that of the subprime market in the US before the financial crisis. Such a highly speculative market will imply again, if not regulated, a very high level of leverage and therefore in the middle and long-term it will create huge financial instability. Indeed, the mechanism could be viable only as long as Greece is not defaulting, in which case losses would be dramatic. Here lies the fear of Mr Trichet.

The question is: how to find a way to decrease the interest rate on Greek bonds? Are the big three international rating agencies playing a very cruel game with us? In giving lower ratings to sovereign bonds in Europe they give incentives to speculators. Hence they are responsible for creating new international financial stability risks. European leaders need to be audacious: it is high time to regulate financial markets. It is high time to end the supremacy of rating agencies and Wall Street bankers. It is high time to develop a financial system that serves the real economy and not only the speculators. This could be done through a larger ECB intervention or in giving new powers to the European Stability Mechanism, without necessarily implying inflationary risks. If this were the case (which is not necessarily bad news in macroeconomic terms), this is again a good argument for a European finance minister in charge of regulating the links between the real economy and financial markets.

In the 1950s, courageous European leaders put together two controversial elements (coal and steel). We all know this success story. Europe and especially the European leaders now have to give emphasis to further financial and economic governance. Germany and France have always been the engines of more integration. This is no longer the case. The current leaderships of France and Germany are too weak and too concentrated on daily business and their main problem of Europe, which is that they are both still thinking of Europe in the pre-euro period.

To ensure European coherence and European macroeconomic policies we need a real European sovereign bond market. Only eurobonds can assure European coherence and further European growth. However, the ECB is a reality, the euro is reality. The eurozone countries cannot persist any more on national responsibilities and sovereignties in fiscal and monetary policies. This is no longer acceptable. For example, in the broader context, the ‘Europe 2020’ strategy is the most prominent example of how it should not be done. This is a precondition to overcome speculative influences and speculative bubbles.

(*) Ernst Stetter is secretary-general of the Foundation for European Progressive Studies (FEPS). www.feps-europe.eu