Tuesday, March 09, 2010

Speculators Are Not the Reason Greece Has Problems

I can't believe I even need to write this post.  Really - I don't want to - but when the Prime Minister of Greece places the blame for his country's woes on "speculators,"  the end really must be near.   Maybe I'll just try to let others explain it in their own words:

From Jim Rogers (via Z/H)
"No, of course, not, if you think that speculators and hedge funds went out and run up a deficit of 12% of the GDP, of course not. The Greeks did it and the Greek politicans did it. Then other people see the problems and started selling. The main people who are selling in Greece are Europeans who are selling, cause they see the problems. It's just like in America. When Fannie Mae got into trouble, people sold Fannie Mae. Speculators got in too, as people call then, but speculators did not cause Fannie Mae to run up gigantic debts and get into trouble, management did. And then that attracted investors who tried to take advantage of the situation."

ZeroHedge elaborates: "Not to mention that if speculators are truly to blame, all they do is create a terrific buying opportunity for everyone else on the other side of the trade."

MISH weighs in on the insanity:

"What hurt Greece was Greece...Moreover, one should not just blame Greece, but the EU itself for not looking into the finances of Greece better. Indeed it is highly likely the EU purposely overlooked problems in Greece in order to expand the EU. The EU is also responsible for structural problems as Volcker pointed out.

Now, as bear markets expose and magnify structural issues, Greece and the EU are blaming everyone else for problems they caused."

You can head back to another piece at ZeroHedge for the wrapup - where German regulator BaFin concludes that there are "no signs of massive CDS speculation against Greece."

Look, folks:  CDS did not kill Greece, short sellers did not kill Bear Stearns, and no one is  metaphorically buying  insurance on their neighbor's house and burning it down.  Greece burned down their own house with years of poor fiscal decisions. 



Yangabanga said...

Everybody and I mean everybody knew that Greece should not have been allowed into the EU/Euro. That was a reckless move done for political reasons.

And the EU/Euro need to face the consequences of all the cheating that went on (by almost all members) to meet the Maastricht treaty in the first place. And to face the consequences of never really defining the implicit guarantee by the ECB and EU member countries to bail out the weak countries.

Wait, overexpansion due to dubious political goals, book cooking and undefined implicit guarantees? That sounds like Fannie and Freddie too!

But What do I Know? said...

Can I try to parse the differences here? When the politicians say that the speculators are responsible, what they mean is that the game of extend-and-pretend was going along fine until the specs came in an demanded more money (higher interest rates). There is an element of truth in this. On the other hand, the speculators would argue that the house was already crawling with termites and all they did was spot an opportunity to buy some cheap insurance on it. There is also an element of truth in this.

I guess my point is that when you have an unstable back porch at your house, whose fault is it if it collapses when the neighborhood ruffians come over and jump up and down on it? The people who own the house say the damage was caused by the hoodlums and the hoodlums say the porch was rotten.

There's probably a better metaphor for this situation, but since each side can blame the other with some element of truth, arguing about it is pointless (in the sense of arguing to find a solution, not to deflect blame.)

Kid Dynamite said...

BWDIK - that's an ok start, but we can improve on the metaphor: the "cds speculators" don't break your porch - they are, if anything, the messengers. I'd liken them to the inspector that comes in and says, "hey - your porch may have a serious problem - you should probably think about trying to fix it"

preventing the inspector from looking at your porch doesn't make your porch any stronger - and eliminating CDS doesn't change the finances of the underlying entity - although it MAY allow the extend and pretend game to continue longer than it otherwise would/should have.

But What do I Know? said...

Thanks, KD. I wouldn't liken the CDS buyers to an inspector, but to someone who would benefit from the rotten-porch diagnosis (maybe an inspector with a porch repair business on the side who threatens to report you to the local authorities.) The CDS buyers are not dispassionate observers--a helpful neighbor who points out that the porch is rotten--but rather players who are looking to get paid from the situation.

I'm not saying they shouldn't get paid, but rather their motivations are not purely informational. . .

As for how long the "extend-and-pretend" game "should" go on--be careful what you wish for. Maybe we're all better off with some illusions and not the "truth." Right now the truth could be pretty painful--as much as we'd like to believe that we personally could handle it, I'm not sure society could.

Kid Dynamite said...

BWDIK - this is a very important distinction that i've mentioned before, and it's the main reason the "buy insurance on your neighbors house and then burn it down" analogy is total crap.

i can buy CDS on Greece, and be incented to see Greece fail, but, and here's the key - I CANNOT MAKE IT FAIL. i cannot burn down Greece's house.

now, there are very specific, rare circumstances where if i own the underlying debt (and i think this is much more applicable to corporations), and over-insure it with the CDS, I can actually burn the house down when the bankruptcy negotiations happen and, as a debtholder, I force bankruptcy. But i addressed this in an earlier post:

But What do I Know? said...

Thanks for the comments, KD. While I would agree that the speculators can't "burn Greece down" for the insurance money, they can create an atmosphere where refinancing costs are higher than they otherwise would be. From the politicians point of view, the speculators are making them pay more for their refunding (and making them cut their handouts) by talking bad about them--justified or not, they're not going to be happy about it, and undoubtedly are going to snarl at those meddlesome kids. . .

Kid Dynamite said...

BWDIK: i really don't want to belabor this point, but "From the politicians point of view, the speculators are making them pay more for their refunding" is exactly the falsehood.

Greece has to pay more for their refunding because their finances suck balls. not because speculators are buying CDS on Greek debt. that's my point.

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