Serious people like Munchau of the FT have been willing to use Greece as an illustration of another ‘problem’ like the CDS market. So too has Michael Barnier.   While Munchau’s foray produced plenty of argument in the FT Letters page (see my summary), and quite a lot in the blogosphere (I won’t bother linking), the argument that Greece is being brought down by speculators seems to have faded a little since the EU bailout (which you can read about on Stephanomics).

For example, this long piece in the FT, while having some market data, is all about the real budget figures, in essence. Yes, their debt costs contribute to a spiral – if they could borrow at German rates, life would be easier – but a great chunk of the rise in debt to 150pc of GDP is surely from a fundamental budget mismatch, and a low expected GDP growth.

So, here are the latest facts (hat tip the Economist) from Bloomberg.

  • The EU’s statistics office said Greece’s deficit was 13.6 percent of GDP last year, topping the government’s two-week-old forecast of 12.9 percent and the EU’s November prediction of 12.7 percent. “Uncertainties” about the quality of the Greek data may lead to a further revision of as much of 0.5 percentage point, Luxembourg-based Eurostat said.
  • In the latest IMF World Economic Outlook Greece is expected to shrink in 2010 and 2011 – th e only country in Europe expected to shrink in 2011
  • It has a current account deficit of about 10% (comparison: UK = 1.6%)
  • Influential trades unions attack the IMF’s crazy idea that wage cuts might be needed to make Greece more competitive
  • They do not have a large manufacturing sector that is structurally able to export very much

Now you’ve read all that, a simple hypothetical question.   Suppose you had 1000 pounds to lend.  You can choose to lend it to Greece, Germany or Vodafone.   What interest rate would you require for each?  If you have a good think, and come up with a higher number for Greece than the other two, do you know what you’re doing?  You’re speculating

And if you come up with the same number for some reason of ‘fairness’, you’re mad.


17 thoughts on “Speculators bring down Greece. Really?

  1. And if you come up with the same number for some reason of ‘fairness’, you’re mad.

    Or a retired tax accountant. Did I just write that? 😉

    It’s a very good Gedankenexperiment to get people to do, to try and drag them round to seeing why governments’ interest rates are arrived at the way they are. Too many people just don’t stop and think about the way this sort of thing works, and then they repeat everything Polly Toynbee has ever told them.

    But it’s a bit of a job to get 60mn people to stop and think for a moment. Couldn’t we have a whip-round and put on an advert during Corrie?

  2. I think there is an issue with naked CDS that needs to be addressed. However, those who are trying to blame the problems in Greece on the evil speculators are barking. The yields on the underlying bonds were rising long before the CDS started going through the roof as the unhedged banks started scrambling for insurance.

    The spread between Greek bonds and German bunds is proof that the eurozone is dysfunctional. There is no monetary union only a regime of fixed exchange rates. The euro as sold should have led to convergence of yields to the benchmark bunds. Speculators did not create the spreads, they diverged when it was realised that there was no monetary union. There is no way out for Greece, bailing them out by rolling over debt is only a temporary fix. They need to leave the eurozone and default on their debt by redomination in a local currency and rescheduling the maturity.

    Moody’s have come out and said what some of us have been saying for six months. A hung parliament can be a positive because fiscal consolidation will have more democratic legitimacy.

    ‘ Moody’s Investor Service, which provides ratings for the government debt, said that a coalition government could prove a “positive” because it would mean a more complete mandate for public sector austerity.

    “We do not think that a hung parliament will have a direct impact on the the UK credit rating,” said Arnaud Marès, the lead analyst for the UK at Moody’s. “If you had a fiscal plan agreed by a coalition, that could actually be quite positive, because it would imply broad popular support.”

      1. A world in which Moody’s gets a say is a world that is all wrong.

        I think former Fed Reseve Bank of Dallas Pres Bob McTeer (who is in all fairness a bit of a libertarian) has it exactly right:

        “Yesterday, we saw a sharp market reaction when one of the rating agencies that gave AAA ratings to mortgage-backed securities larded with subprime loans called into question the credit worthiness of Britain. As is the case with the United States and the Federal Reserve, Britain and its Bank of England have the ability to create new money if necessary to pay off its debt at maturity. There is no sovereign credit risk. There is no need for credit rating agencies to opine on the credit worthiness of sovereign debt.”

      2. Everyone can have a say. What you say is known by whoever had that ‘sharp market reaction’. Let’s be liberal.

      3. Actually, if I were King, I would outlaw Moody’s. Or at least place them under severe regulatory restrictions. How’s that for liberal!

      4. um, not very (feverishly looking up the Royal family tree, breathing sigh of relief …)

      5. Perhaps not. But is it less liberal than a system where we allow a bunch of venal yahoos (“We rate every deal. It could be structured by cows and we would rate it.”) to determine what our policy response to the crisis is as a soveriegn nation? Even if “austerity” were sensible, I didn’t vote for Moody’s or Fitch.

      6. I still don’t get why who you vote for or not determines who can give an opinion. Would Moodys be allowed to have a blog? And who works out who is a venal yahoo?

        And how exactly have they determined our policy response? We give money to funds, who then choose whether to lend it to the Greek government. They don’t want to, because the Greek gov don’t look all that likely to pay it back. In a ratings agency free world, it would still happen.

      7. Anyone can have an opinion. Not everyone can have a say. For instance, Moody’s has more influence with the UK government than my old Mam. Both Moody’s and my mother have opinions and that is fair enough–no one is disputing the right of individuals or organisations to think for themselves. At issue is whether we, meaning the UK (I’m not talking about not Greece–Greece has big problems; this little sub-thread developed via a quote from Moody’s on the UK’s outlook in the event of a hung parliament) should be basing policy decisions on what the rating agencies think we should do (namely, austerity measures). I.e. I’m claiming that S&P/Moody’s/Fitch should not have influence. I’m fine with them having opinions, even if they are pretty crazy.

        Similarly, it is my opinion that “venal” describes qualities that the rating agencies posses. I think that this is a more than fair assessment given their behaviour over the last decade–structured by cows, indeed.

  3. Speculators help bring down Greece, as they did in the past with Argentina et al.
    Sure they didn’t cause the problem but didn’t the Greek government get a helping hand from the aptly named “Goldmen”?
    Sure the Greeks fudged, but didn’t the other EU member states know (or at least guess) about that? And aren’t others doing the same (think of Italy, for example)? See what I wrote recently:
    And then, another slice of CDS? Who “manages” (what’s in word?) these?
    I would agree with Richard W about Greece leaving. The only problem could be: who’s next? Some economists (mainly in France) advocate for…. Germany to leave the eurozone and get back to its mark.
    I don’t get Giles’s conclusion. Fair? What is fair? To refinance private banks guilty of financial crimes at 1% max. and making a country pay 5, 7, 10%. Double standards out there?
    And we shouldn’t give a damn about what rating agencies say about elections and a “hung parliament” when they are not even capable of assessing company strengths and reakl value (remember Enron?).

    1. Can you describe to me the alternative universe in which Greece’s fiscal behaviour was the same, and the speculators acted in some sort of other way short of insane charity, and the Greeks would not be in this trouble?

  4. Actually, without those evil speculators, the Greek problem might have been even worse….let me explain.

    Most of the so called “naked” CDS exposure was put on years ago, when it was very low and very cheap. 2006-7 era, when Greek CDS was only a few basis points. Many of the hedge funds bought it basically as a cheap gamble, which would not cost them much if it went wrong – it also made for good crisis protection if Europe went belly up.

    When Greece did actually blow up, it wasn’t hedge funds selling bonds or buying CDS. It was real money pension funds offloading their risk. The biggest buyers were actually the hedge funds buying bonds/selling CDS to cover their positions and take profit. So much so that Moore Capital have actually ended up long Greek debt.

    Their actions actually provided the market with a natural buyer for what is effectively junk debt. Without those old shorts in the market, and people willing to “speculate”, the problem could have been significantly worse.

  5. Greece and Spain won’t pay back. The only thing Germans can do is:
    REPOSES 170 Leopard 2AEX Battle Tanks from Greece, and 190 Leopard 2A6E Battle Tanks from Spain.
    U.S.A must REPOSES 170 F-16 Jet Fighters from Greece, … the rest is gone with the wind …forever …
    Greece must stop paying lucrative pensions with borrowed money, reform the free health care system, and cut down, 4 times the military budged.

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