Here is a contender for most overused analogy of the year: buying naked credit default swap protection is like buying insurance against your neighbour's house burning down. Hedge funds bought it on Greek debt then fetched the fuel and matches, according to European politicians agitating for a ban. This is daft. CDS speculators do not have the power to push countries towards default. The better argument for regulatory interference in CDS markets is to protect buyers and sellers from themselves, not defend their targets.
Yes, one of the biggest lessons of insurer AIG's implosion in 2008 was that CDS can create concentrations of counterparty risk that threaten not just their users but the stability of the financial system. Sensible regulations are in the works in the US and Europe to increase transparency and force contracts through clearing houses.
The latest rumpus is less sensible. Greek politicians mutter darkly that climbing sovereign CDS prices have driven up yields on their bonds, and so their country's cost of funding. There is no clear evidence to support this. Sovereign CDS markets are dwarfed by their bond market counterparts: the value of net notional CDS on Greek bonds is about 2 per cent of outstanding Greek debt. Bond investors are made of sterner stuff than to panic when CDS spreads move higher and there are no obvious technical reasons to suppose the tail is wagging the dog.