Burst Greek Bubbles, Spooked Fund Managers: A cause for restrained celebration


vultures imagesThe international press is replete with reports of how London-based fund managers were spooked when they heard of SYRIZA’s views on the nature of Greece’s conundrum and on the party’s intention to work towards a debt restructure and a re-orientation of social and economic policies toward social cohesion and economic growth. Here is my reply…

In 2010 the European Union, with the IMF in tow, decided to apply, on a gigantic scale, the bankers’ usual trick when confronted with clients whose insolvency threatens their own position: Extend (non-performing loans) and pretend (that all is well). Only the EU ‘client’ in question was not some company or financial institution but the Greek state.

In cahoots with Greece’s political elite, Europe extended to the bankrupted Greek state the largest loan in human history on condition that it would shrink its national income – a recipe for averting a default by postponing it into an uncertain future. If this sounds outlandish it is because it was outlandish. Why did they do this? The answer is as simple as it is saddening: In order to transfer hundreds of billions of potential losses from the books of the private banks to the shoulders, first, of the Greek taxpayers and, after these shoulders buckled (uner the weight of an austerity-induced economic depression), to the shoulders of taxpayers from across Europe.

In 2012 the ‘extend and pretend’ strategy was given another twirl with the second loan package and a haircut that undermined small bondholders and Greek pension funds – as the foreign banks had already (courtesy of the 2010 bailout) unloaded Greek government debt and the Greek bankers (who did suffer from the haircut) were looked after by the Greek government through a combination of capital infusions (using money borrowed from the troika), deferred future tax obligations, government guarantees of their worthless private bonds and, last but not least, scandalous provisions for not diluting the bankers’ control of ‘their’ banks while these ‘transfusions’ of public funds were being effected.

These ‘extend and pretend’ tactics had an expiry date. The German government could not afford, politically, to recommend a third massive loan for hopelessly insolvent Greece to the Bundestag. This is why, from 2012 to very recently, Berlin, Frankfurt and Brussels have been attempting to take the ‘extend and pretend’ strategy onto a higher plane of sophistication and of subterfuge. Here is what they did: They saw to the creation of two bubbles, one in the market of Greek government bonds (beginning last April, when Greece was brought back into the markets under an invisible, but very real, cloak of supporting missives by the ECB and the German government) and one in the Greek stock exchange where bank shares and warrants were inflated in order to create a semblance of Greek-covery (based on subtle but powerful messages that ‘Europe’ was determined to turn a blind eye to the black holes in the Greek banks’ asset books).

These bubbles had a purely political motivation. They were the only way in which, prior to the European Parliament elections, ruling politicians across the Eurozone, in Berlin and in Athens alike, could argue that the Euro crisis was ‘over’ and that they, therefore, deserved a vote of confidence from European citizens. For if Greece could be shown to have ‘turned the corner’ surely the Euro Crisis must have been dealt a decisive blow. “Austerity and the bailouts worked”, was the intended message.

Naturally, from 2012 onwards, smart traders (primarily hedge funds) caught a whiff that quick profits were on the cards on the back of the twin Greek bubbles that ‘Europe’ was inflating for political advantage (with the enthusiastic participation of the Athens government, of course). As I was writing back then (see When Johnny Got His Gun – and is aiming for some grim, Greek pickings), when John Paulson and Co. move into a place like Greece, only fools rejoice. Never interested in long-term investment, these gentlemen home in carcasses, seeking to pick the last morsels of flesh before fleeing to other places from which to extract their next pound of flesh.

In short, the Paulsons of the world always knew that Greek-covery was a twin, politically engineered, bubble that would burst within a year or two. Their finger was on the “sell” button even before they bought Greek bonds and banking shares. And they pressed it a few weeks ago when they realized that Berlin is no longer keen (or has very little cause left) to keep pumping up these bubbles – that they are now prepared to let the discredited Greek government fall, hoping to beat an incoming administration into submission, the same way they beat into submission the then anti-bailout Mr Samaras in 2011.

In recent days, much has been made of meetings between SYRIZA representatives and hedge fund managers in London. “Markets spooked” was the main headline. I do not claim to know (or to care much regarding) what transpired in those meetings. What I do know is that fund managers who had allowed themselves to be conned by the twin bubbles Berlin and Brussels, with Frankfurt’s connivance, concocted, were always going to be spooked when reality burst these bubbles. The sooner this happened, the better. ‘Extending and pretending’ has reached its limits, has caused untold human damage in Greece, and has played a major role in maintaining the current irrational macroeconomic posture of the Eurozone.

  • So, let the twin Greek-covery bubbles burst ASAP.
  • And let the inane fund managers get spooked.

After all, that John Paulson and his ilk “will not make further investments in Greece” (as reported in the Financial Times) ought to be a cause of celebration – at least amongst those not utterly innocent of recent financial history.

Disclaimer: None of the above endorse the views that might have been put forward by colleagues George Stathakis and Yannis Milios to fund managers in London. I am not privy to those meetings/communications. But I do not need to be. The above points are valid independently of the particular slant that these communications took.

20 Comments

  • A brave response to a great extent. But Yanis you tend to disregard one key point.

    For us Greeks, we are the center of our world (We are therefore we exist, sort of thing). For the rest of the world perhaps not.

    One of the nastiest traits of globalization is that it can completely bypass you.

    In a global economy countries resemble airports where the planes of commerce land or take off. All a country can do is make the airport attractive and safe. The decision of whether to land on such airport belongs to others other than the country in question(the airport manager).

    Therefore, the worst possible thing it could happen to Greece (or any other country in similar situation) is for all other players to completely ignore her and let her burn in slow temperature for a long time and until self-destruction.

    The money managers evaluating Syriza’s plan are neither vultures nor empathetically against Syriza. They are simply saying: after evaluating what we see and hear we have decided not to land on this airport. It’s far more impersonal than a struggle of the good vs. bad guys you are trying to portray and far more lethal for the viability of the airport.

    • Agreed. And this is why I would have addressed them differently. What you are saying is that Greece is between a Scylla and a Charybdis: the Scylla of the current asphyxiation (which necessitates major debt relief) and the Charybdis of stagnation due to lack of investment (as the world goes past us). The trick will be to steer a steady course. Odysseus like, between them and cross with minimum damage.

    • It would be so nice to live in the ideal market where “…the planes of commerce land or take off… from the attractive and safe [and, friendly…] airports…” bringing prosperity to all countries who play by these rules.

      Unfortunately, the reality is somewhat different. Just look at what happened when APAX and TPG bought TIM Hellas and siphoned away 1.2 billion euros of investor money (http://www.bloomberg.com/news/2012-11-29/apax-managing-director-aliberti-sued-over-hellas-debt.html). Or follow the LuxLeaks stories of all the major companies that avoid paying taxes on the profits they make in Greece. And it is not only Luxembourg that offers such services, but Netherlands and other places as the tax-avoidance story about the profits of Eldorado Gold shows.

      So, let’s make sure first that the European and Greek governments ensure not only the “safety and attractiveness of the Greek airports” but also their fairness and strict compliance to the law of the land.

    • K. Tempis:

      We are talking two different issues.

      1, I am talking reputation. If your reputation is ruined as an FDI destination then you can’t have a functioning Greek economy.

      2. You are talking about better administration and I don’t have any problem with an efficient/just administration. In fact I happen to be a great fan of it.

    • To Dean Plassaras:

      Reputation (good reputation or “kalo onoma”, I presume) is at least overrated in this context. If good reputation were necessary for European or US academics in macroeconomics or Wall Street managers, for example, most of them (90% ??) would have retired or gone on permanent vacation to Papua New Guinea for failing to predict, diagnose or even treat correctly what happened after 2008.

    • K. Tempis:

      Good money managers always know when the market is going down. But they are prohibited from telling you because among other things it’s not legal to make your own market (manipulate markets) by introducing panic.

      Wall Street knew in 2008 what was about to happen and the smart managers bought puts (instead of calls) and made 10 times the money they would have made otherwise.

      Don’t expect a private phone call that the markets are going down. Look at the charts and by understanding the Greek Golden Mean (aka Fibonacci waves) you already know in advance what is going to happen.

      You don’t have to be a genius right now to understand that global markets after 6 years of recovery are headed south. Nor do you need Wall Streeters to tell you about it. Their job is to make money. Your job is to protect yours. Markets simply are looking for an excuse to act in a very predictable/predetermined way. They can grab on to anything and call it the “real cause”. The truth is that human psychology has rhythms which science already knows. I am surprised you don’t know this already and that you are blaming Wall Street about something which is as natural as life itself. Wall Street owes you nothing other than a lesson of caveat emptor.

    • Dean,
      Goldman Sacks almost went south in 2008. If it wasn’t or a certain insider to bail them out with AIG they would have been in a much worst situation.

    • Kostantine:

      Goldman Sachs did not go down nor did it have any particular need to be recapitalized. It was subjected to the same game the Greek banks were(towards enriching the state). And the whole purpose was for the government to make money off banks because they were the “sinners”.

      The investor in Goldman Sachs case was the legendary Warren Buffett who made a pretty penny on it preferred shares of Goldman Sachs which by the way Goldman Sachs repaid as soon as possible(and at record time) because the Buffett returns were eating into its profits.

      In Greece’s case, the banks were nationalized and the state still owns 70% of them but Greece is Greece. An amateur’s game of inventing things as we go. The US system was up and running at no time after the US government got its dealer’s cut and the pathetic Greek banking system is beyond broken with the government unable to redeem its shares and get out of the unsuccessful investment. That’s why Greece still holds 70% of its banking system; because it can’t offload it even if it wanted to.

  • By locking themselves up behind closed doors of the City’s “den of thieves”, SYRIZA’s economic emissaries (a moderate neoliberal ‘political economy’ professor from Crete and an Althusserian engineering lecturer in Athens) should have been warned that they would expose their party to the risk of a provocation, a diversionary media spin of scaremongering over Greece, similar to that of the mid-October mini-crash.

    Indeed, the customary “leaked” hedge-fund memo crying “wolf” over the SYRIZA duo’s unrecorded consultations in London was masterfully timed and over-dramatised by the financial media so as to completely overshadow the latest Greek government “negotiation” fiasco with the troika’s economic hitmen in Paris, on the same day.

    Professors George Stathakis and Yannis Milios probably basked in the glory of their narrative being touted as “worse than communism”, “total chaos” and an “alarm signal for fund managers to sell everything Greek in their portfolios”.

    Never – not even in their wildest student years – have these particular SYRIZA cadres received such glowing political compliments and “leftist” credentials, right from the horse’s mouth. Because otherwise, the “modesty” of their public “proposals” (articulated in Greek instead of broken English) would make Yanis Varoufakis, Stuart Holland and James Galbraith blush.

    What then can we make of this charade?

    Well, it looks like a rare conjuncture where both friends and foes of the Euro are relishing the prospect of the common currency’s precipitous slide back to the exchange rate of its 1999 launch, namely EUR/USD=1.17, to pull Europe out of its deflationary quagmire with a healthy all-round expansion of EZ exports and concomitant revaluation of imports with the rest of the world.

    This could ostensibly be enhanced by another bout of Greek “political turmoil and uncertainty” some time in February, rather than by Mario Draghi’s haphazard and toxic version of Quantitative Easing, which has already received the thumbs-down from Berlin.

    As the aforementioned mini-crash test in October has shown, the risk of “contagion”, with a run on peripheral sovereign bonds other than Greece’s, has finally been harnessed, much to the dismay of the Euro’s many foes – not only on the other side of the Atlantic.

  • Dean,

    You don’t govern only to make a country an attractive airport for investors to land on.
    You govern to make a country an attractive place for its own citizens to invest and prosper.
    This cannot happen by changing the tax laws every two years or by overtaxing your citizens.

    Also you don’t govern by literally selling all the prized possessions like ports, airports, highways, telecom
    networks, to the Chinese or the Germans while at the same time you are stealing from the pockets your own
    citizens.

    • Dean,

      These perceptions have been around for a while at least since 1980.
      The Greek unions have made sure of this.

      There is healthy FDI and there is short sighted FDI.

      Selling the ports to the Chinese because the Greek government cannot
      negotiate with its own unions is short sighted. There has to be a better formula.
      Selling all of OTE (telecom monopoly) to Deutche Telecom as a way of dealing
      with the powerful unions (again) is not healthy.

      Someone has to negotiate a better deal in each of these cases. Otherwise you
      are labeling it FDI but in reality you are selling off the country and its people
      piece by piece in order of the most desirable assets first.

      That is what the current FDI is. And by the order of asset desirability we have:

      1. Telecom monopoly > Germany
      2. Main port of Piraeus > China
      3. Key airports > Germany

      FDI is when a German company invests in an R&D facility in Greece, not when they
      buy the telecom monopoly and collect the Greek peoples money and send it to the German banks while at the same time they do all the R&D in Germany.

      You fix taxation and provide a stable investment environment, you fix the unions and FDI will come, FDI is not selling off the best parts of Greece.

      What Samaras did was continue the sell-off to please the Troika and overtax middle income people again to please the Troika.

    • Kostantine:

      The FDI in Greece has a very lopsided picture. As you can see here after 2008 there is only one FDI (main) origin which is German and it’s very worrisome towards its lack of diversification.

      The Chinese investment actually represents the right move given that Greece has turned into an exclusive German colony. It is also worth studying why only Germany deems fit to make such large FDI in Greece. Obviously they totally control the game and the so called Greek government which they force to act as they please. Numbers don’t lie. Have a pick:

      http://www.investingreece.gov.gr/default.asp?pid=21

    • Being attractive to foreign investors is a good thing.

      But being attractive to them, while at the same time being very un-attractive to domestic investors is really bad. Think ‘banana republics’.

    • Thank you Dean and Vasilis.

      China comes in to fill a vacuum. That is the problem. If there was no vacuum the terms of the contract in the container ship terminal would be very different.

      The vacuum is generated by Greek labor unions. They simply did not want to the terminal to work for the good of Greece, just for their pockets.

      Hence the vacuum, hence the Chinese taking advantage.

      Same picture with the Telecom company.

  • Dear Professor:

    how a country which needs to borrow constantly to pay pensions and civil servant salaries and who needs to pay 700+ basis point premium to borrow in Euros from the markets will be able to haircut its main creditors in the Eurozone now? Greece had 5 years to reform the state. Instead they paid lip service to all signed “mnemonia”, and now they want to exit the IMF / Eurozone supervision (ND + Pasok) or haircut their main creditors (Syriza).

    Who of the official creditors and for what reason would agree to either? They got their own budget issues to solve rather than maintain an artificially high living standard among some parts of the Greek population.

    So I am afraid the Greek population should prepare itself for further “mnemonia” as far as the eye can reach, or a swift exit from the Eurozone. This is the real dillema and not Syriza vs. New Democracy policies.

    Regards
    Costas

    • From one Costa to another:

      Not only Greece doesn’t need any more memoranda but Greece needs to kick the Troika rats decisively out of Greece. This is one part Syriza is correct about and this is coming from me ( a dedicated Syriza sceptic).

      Troika is nothing more than bureaucratic, out-of-depth, euroignoramus clowns who need to be publicly rejected in the most humiliating way so that they learn once and for all that idiots who have no clue on financial matters are not welcomed among civilized nations.

      And you need not be afraid because the memorandum era is over. We have taken in European idiocy non-stop for 5 long years. Now is the time to strike back with unlimited vengeance.

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