Streetwise Professor

March 8, 2010

Cutting Off One’s Nose to Spite One’s Face

Filed under: Derivatives,Economics,Financial crisis,Politics — The Professor @ 5:24 pm

Greece desperately needs people to buy its bonds.  So what does it do?  It excludes potential buyers, specifically hedge funds:

Greece ordered its bankers to exclude hedge funds from a bond offering this week in an effort to punish the speculators it blames for destabilising its debt markets.

The decision came amid growing anger among European leaders over what they see as the role speculators played in undermining the Greek debt market and driving the country towards a possible default.

. . . .

According to people familiar with this week’s €5bn (£4.5bn) Greek bond issue authorities in Athens told banks handling the sale to make sure they did not allocate any bonds to hedge funds or any bodies that might be a proxy, or front, for them.

Uhm, those hedge funds that want to buy are going to result in lower interest rates for Greece.  Excluding them from the primary market can only make things costlier for Greece.  (Although since these folks can buy in the secondary market, the effect of excluding them from an auction might not be that large.)   You don’t punish bearish hedge funds (not that they deserve punishment in any event–see below) by taking a smack at bullish ones.  How assinine.

The Queen of this Greek drama, Prime minister Papandreou is absolutely over the top with his anti-speculative rants:

Greek Prime Minister George Papandreou, drawing parallels with the 1947 fight to contain communism in Europe, called for trans-Atlantic cooperation to combat “unprincipled speculators” who threaten to bring a new global financial crisis.

“Europe and America must say ‘enough is enough’ to those speculators who only place value on immediate returns, with utter disregard for the consequences on the larger economic system,” he said in a speech today in Washington. “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.”

Papandreou and other leaders such as German Chancellor Angela Merkel have blamed much of the surge in Greek financing costs on market speculation, rather than its inability to tame the region’s biggest budget deficit. Germany and France are pushing for curbs on “speculators” using derivatives to bet against Greek debt, which will be ready in June, officials in Berlin and Brussels said today.

Papandreou called the market for credit-default swaps a “scourge” that “haunts Greece and all of us.” U.S. and European regulators need to bolster regulations to curtain such activities, he said, or “a small problem could be the tipping point in an already volatile system.”

Puh-lease.  I mean seriously.  What should haunt you, Mr. Prime Minister, is years of profligacy only partially concealed by financial chicanery (enabled, true enough, by some of the very banks against whom you rail today).  If you are facing some sort of financial  Armageddon, it’s the fault of your government and its predecessors, dating back years.  I would say that it was the governments of Greece–and other countries, the US included–that acted with “utter disregard for the consequences on the larger economic system.”

And which are acting with such utter disregard today.  Only more so.

But the shoot-the-messenger histrionics don’t end with Papandreou.  All of Europe’s government leaders are closing ranks to blame everybody but those who actually spent the money they didn’t have and couldn’t pay back.  Here’s Sarkozy:

“If Greece needs them (the measures), we’ll be there,” he said. “Speculators … must know that ‘solidarity’ means something.”

France, Germany and Greece will take a common initiative to fight speculation, and the euro zone’s two biggest economic powers “have decided to do what’s necessary so that Greece is not isolated,” Sarkozy said.

And Merkel:

German Chancellor Angela Merkel said that Greece doesn’t need financial aid, as she turned her focus to restricting the use of derivatives to halt “speculators” from exploiting countries’ budget deficits.

“Credit-default swaps, where you insure your neighbor’s house just to destroy it and make money from it, that’s exactly what we have to curb,” Merkel said at a joint press conference in Berlin yesterday with Greek Prime Minister George Papandreou.

. . . .

“We must succeed at putting a stop to the speculators’ game with sovereign states,” Merkel said. “We can’t allow speculators to be the profiteers of Greece’s difficult situation.”

So the Merkel story is, effectively, that the Greek financial house was all in order, nice white stucco and all, until one day, out of a clear blue Aegean sky, some malicious speculators decided to burn that house down.

What a crock.

It would be more accurate to say that the Greek financial house was used to store gasoline, while the family was busy puffing away on cigarettes (the Greeks being among the greatest smokers in Europe, BTW) and throwing their butts and matches around with abandon.  Some people noticed this, figured out something bad was almost inevitable, and put their money where their eyes were.  Yes, they probably made a few bucks for themselves, but also did the service of accelerating the inevitable fiscal reckoning, not just in Greece, but in Europe as a whole.

Oh, and even Merkel’s own German financial regulator, BaFin, denies that speculation caused the Greek crisis:

German market regulator BaFin said Monday that so far, it doesn’t see any sign of massive speculation in credit default swaps against Greek government bonds, despite some recent press reports suggesting this.

A significant reason behind widening CDS spreads is the increasing demand for insurance against Greek risk, BaFin said in a statement, adding that it closely watches the government bond and credit derivatives markets for selected euro-zone countries.

. . . .

BaFin said data published by the U.S. Depository Trust & Clearing Corporation don’t signal an increase in new open positions and don’t indicate massive speculation. It is true, however, that the gross volume of outstanding CDS contracts for Greek government bonds amount to around $83 billion as of Feb. 12, according to DTCC, more than twice the $41.1 billion a year earlier.

In other words, Papandreou, Sarkozy, Merkel et al are saying: “Don’t bother me with the facts.”  They don’t want to face up to fiscal realities, so they are trying to direct blame elsewhere.

Politics as usual, in other words.  And it is politics as usual that put Europe in this positions in the first place, and politics as usual that will prevent any fundamental change.

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1 Comment »

  1. I essentially agree with this.

    However, one should also note the cathartic, socially-stabilizing effects of scapegoating rhetoric. Plus, no successful politicians blame themselves anyway.

    Comment by Sublime Oblivion — March 8, 2010 @ 6:50 pm

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