09 March 2010

Greek crisis and the evil speculators: the scapegoats again

In February, George Papandreou, the Greek Prime Minister, started the chorus by pointing the finger at hedge funds and other so-called speculators for the troubles of Greece. Nicolas Sarkozy, the French President, Jean-Claude Junker, Luxembourg Prime Minister and Head of the Eurogroup, Angela Merkel, the German Chancellor, and Barak Obama, the US President (Obama by demanding that certain hedge funds keep record of their transactions on the Euro and Greek bonds and CDS) followed suit.

For a couple of days, during Papandreou visit to France, Luxembourg and Germany, the rhetoric rolled again. These are misguided and counterproductive.

Tue culprits are the successive Greek governments that had disastrous fisacal and economic policy, not the speculators. Deficits are not the results of speculation, investment decision is the result of an analysis on a given situation. Investment has no emotion, it is factual. What are the facts?

First, Not all market participants buy CDS bet on a default of Greek bonds; many buy CDS to protect their Greek Government Bond portfolios – which due to the Greek fiscal policy has risen considerably. No speculation here, just a fiduciary duty to protect investors’ savings.

Second, if investors could not protect their portfolio against a country default risk, (i) either this country could not access capital, markets or (ii) at very/prohibitive cost.

Finally, and I quote Commerzbank (courtesy of Saxo Bank):
“Due to the well known facts (deficit and debt levels, manipulation of official statistics in Greece) these market participants however demand a considerable risk premium. Following the collapse of the US housing market the financial markets were accused – by the same politicians as those quoted above – to have been too casual in their approach to risk taking. Now that a more careful approach demonstrates that political errors have been made, this approach attracts equal criticism. A little more consistency would not go amiss here!”
Again, all this, like the prohibition of short selling bank stocks during the 2008 financial crisis, is just smoke screen to hide the reality of 20-30 years of policy mistakes that have been unfolding since August 2007 (one could go back to 1971 with the end of the USD/gold peg).

I do not believe that by the end of 2012 the Greek budget deficit will be down to 3% against 12.7% today. The Greeks have a Herculean task facing them, but shifting the attention from the roots of the problem will end being even more painful. Nor do I believe that France, Spain an other Eurozone countries will be able to be below 3% by 2012.

All this gesture and noise from politician really outline the lack of understanding of markets dynamics and investing psychology. Interesting enough, after some EUR/USD relief following Greece successfully placing EUR billion bonds last Thursday, the EUR is again under pressure since these renewed declarations against the so-called speculators are out. Speculators should thank Junker, Merkel, Papandreou and Sarkozy for their recent declarations. Whatever the Politicians say, markets will be right in the long term since it is not possible to double cross economic fundamentals in the long run (and thanks God for that): it seems they forgot that the forex market is over a trillion trading volume a day and difficult to manipulate…

I maintain my negative stance on the EUR.