Oh, and ignore the triumphant braying from the eurosceptic right, busily trumpeting the contention that what is happening in Athens vindicates their insistence that Britain must never sign up for the euro. It is true enough that Portugal and Spain are the countries next in line for the treatment. But when the turn of the UK comes, sterling will be a doddle.

A doddle to what though? During the ERM debacle, speculators could sell the pound hard, knowing that the Govt were compelled to buy it to keep the value up. Free money. The Eastern economies you mention were tied to the dollar. Greece, equally, is not in a position to devalue (not having control of its monetary policy). But if speculators bet on the pound decreasing in value (by selling it) what happens? The pound devalues. And? It just doesn’t matter as much for a floating exchange rate.

Tough controls on derivatives are the obvious alternative. Those that hold underlying assets have a legitimate reason to hold them, by way of insurance. Those that don’t should be gambling down the bookies or in Monte Carlo instead.

But you’re talking about price fluctuations on the CDS spreads on Greek sovereign debt. These are explicitly about insurance – the clues in the title. Credit Default Swaps. They are a hedge against the default (de facto or de jure) of an issuer. What have the CDS spreads got to do with securitisations? In any event, how on earth are you proposing that the effective abolition of the credit derivative market be carried out? Through a global consensus? Good luck with that.

Blaming speculators is a classic technique employed by failing Governments. But the speculation just takes advantage of the instability, it doesn’t cause it.

OK let’s get a few things straight here.

The amount that has been “bet” against the Euro is not $79bn it’s about $5bn. Which is nothing in the grand scheme of things. You can check the futures exchanges to find the change in open interest if you don’t beleive me.

As for “hot money”, you’ll find that both in 1997 in Asia, and 2001 in Argentina (as well as many other crisis I can name) the biggest movements of money were local investors – specifically private mney and pension funds – trying to get their money out before everything blew up. Hedge funds and investment banks had little to do with either crisis and were in fact big losers.

Hedge funds, which the author clearly knows nothing about, are also much maligned. They have been blamed for this last financial crisis when they had nothing to do with it. People blamed them for short selling, pushing markets down…then banned short selling. The result? An even bigger loss of confidence and even bigger market moves lower.

I doubt any hedge fund has any major short interest in Greek bonds. If nothing else it is way too capital intensive, and to actually attack a country is simply beyond the scale of any of these funds (the bigger hedge funds out there are about $15bn across many strategies. Of which a lot is actually from pension funds).

The big holders are all European long only pension funds. Who are now crapping themselves and selling. They are almost certainly the big CDS buyers as well. I’m sure there are some people speculating around the edges, but the big moves are almost certainly being caused by real money investors pulling their cash out.

In general though, it seems you jsut don’t get it. You are spinning around like a top, blaming hedge funds, then derivatives. You want to know what the real reason for Greek bonds and the Euro selling off is?

Simples.

The Greeks are spending too much money and have too big a budget deficit. There is no credible plan to get it under control so they are going to have to issue even more bonds. Why would you want to be an investor in Greek bonds when they are diluting the value of your holdings AND there is a growing chance you may never get paid back? People aren’t stupid. On the back of that, it calls into question the stability of the Euro, given that several other Euro countries are also under pressure, and Germany can’t bail them all out. Hence the Euro has been selling off.

While not denying that speculators can force a crisis and also not absolving bankers of their role in helping Greece conceal the true nature of its debts, I think a few words might have been order about the outrageous fiscal irresponsibility of the Greek government, if not outright fraud. It’s a bit much to portray this as a story about the evils of speculation … Krugman himself has been warning of trouble in Greece for a long time, not because he was worried about speculative attacks, but because of the yawning fiscal deficit. Krugman would also tell you that the constraints of the Euro itself bears much of the blame. Read his Anatomy of a Euromess

Another article on hedge funds and the markets by someone who doesnt have a clue what he is talking about. Most leading commentators and economists all now agree that hedge funds played no role in the onset of the credit crunch or the financial crisis that followed (aswell as not absorbing a penny of bailout money) – they were merely the people who were smart enough to see the disaster coming before anyone else and sell the shares of the banks that has become insolvent.

And now in Greece the hedge funds are merely the smart money that is moving the exchange rate to where IT SHOULD BE – i.e. far weaker than it was because most of souther europe is sinking in a mountain of debt buil up by generations of socialist governments.

Hedge Funds merely move markets to where they should be and would be – but for the obfuscation and lies of governments and treasury departments.

Um. 1929, 1987, 2008. All cases where a speculation-fueled boom (this is a cause) led, through bad regulation, bad ethics and extremely bad management to very serious depressions (this is the effect). Unrestrained speculation certainly does cause economic catastrophes, it just does so in conjunction with chancers who want a good seat on a bank board after they retire from politics.

I was in Hong Kong in 1997 and it felt like living through the seige of Gondor from the Lord of the Rings, with wave after wave of ‘orks’ speculating against the HK dollar. One by one the Thai Baht, Indonesian Rupiah and the Pillippines Peso fell – but the HK dollar held firm.

Oh happy days.

“souther europe is sinking in a mountain of debt buil up by generations of socialist governments.”

Greece has just kicked out the conservative government which left the socialists to deal with the debt crisis.

Perhaps you haven’t spotted that sterling has already fallen?

‘Speculators’ making bet about what will happen to the Greek economy are irrelevant to the mismanagement of the economy itself. Outlawing betting will not change the financial situation of Greece and is a distraction from who is really to blame for the financial mismanagement.
People who bring the public sector to the verge of bankruptcy are not helping the poor, or any other section of society, except the merchant bankers and corporations looking to buy up assets on the cheap

Blaming speculators is a socialist talking point, irrelevant to the real issues at hand.

Adam the Libertarian

@6 Hong Kong’s story always makes me slightly happy about otherwise dismal period, fair play to them.

The Greek Government can stick to it’s mandate if it wants to. The mandate it was elected for. This doesn’t mean that other organisations *have* to keep hold of their bonds, or buy more. They can choose to sell them. They are in large number, which is why yields are rising.

If you have massive debts, those debts will be more expensive to maintain. You can still choose massive debts if you wish.

What Greece can’t do is devalue their currency or print money. We can and have. Thank whatever god you believe in we aren’t in the Euro.

This is timeless. I almost expect Dave to start talking of the gnomes of Zurich.

When a country allows itself to become so uncompetitive, and have its national accounts so horribly fabricated, why exactly is it an infringement of its rights for the people who had hitherto been gullibly lending it money for f___all to then turn around and say “well, since you are a basket case who can’t stop paying staff far more each year without a riot in the streets, we might want a slightly higher interest rate for lending to you”

It is effall to do with wicked speculators. That is just the usual nonsense trotted out by people on the Left when the crunch of economic logic arrives. Spend too much, show no way of reigning yourself in, and interst rates rise. You don’t need a CDS market to make that timeless logic apply.

Well to be fair it was the fault of speculation. But by politicians, who speculated higher spending could be repaid. And spent much more than any speculative investor could access. So if you want your dangerous speculators, look to governments who spend more than they can afford on the hope that future taxes will cover the debts.

Looks like Dave Osler has been well and truly fisked.

Something you also miss: even if they are speculators, they only make money by being right.

I could speculate that Gordo is doing exactly the right thing by hte British economy. Borrowing vastly to stop the economy plunging into a second recession. My speculation in this case would be to maybe buy gilts, sell CDS on gilts, buy pounds, these srots of things. I only make money if Gordo is actually right in borrowing vastly to prop up the economy.

If I think he’s doing the wrong thing I would reverse all of those speculations.

But I still have to be right to make any money out of them: I still have to have judged correctly what Gordo’s actions will do to the economy. I don’t by my speculations, change what Gordo’s actions do to the economy…..

Blaming the hedgies for the problems in southern Europe is like blaming Arsenal’s defeat on the people who bet on Chelsea to win. The blame should be laid at the door of the euro enthusiasts who ignored all the warnings about monetary union. All the warnings are coming to fruition in the way many forecast 10 years ago. It is not just the eurosceptic right who could see the fundamental error of a monetary union without a fiscal union at the heart of the ‘ euro project ‘. Moreover, the author is ignoring for every person short someone else is long.

The Tobin tax that has been mentioned would be on FX trades not CDS.

I do agree that there is an issue about insurable interest and whether it is right that investors can buy a CDS without owning the underlying security. You can buy life insurance for your wife because you have an insurable interest in her staying alive. You can’t buy insurance on the life of your neighbour because you then have an insurable interest in him being dead. Although in financial markets one can buy the insurance without owning the insured security. Some would say buying CDS without the underlying security can be a proxy hedge. However, plenty are of the opinion that the CDS market creates incentives to make default more likely.

I second (third?) Tim and Richard: those people railing against speculators often mistake betting something will happen with making it happen. Sometimes that is possible – such as shorting a company during an equity raising – but mostly it is side bets at the race course.

CDS are classic zero sum games, usually between participants unconnnected to the underlying entity. They can create perverse incentives. But how do I do that for Greece? Buy the CDS and then somehow ensure that none of the $10trn pool of available worldwide savings makes its way to Greece? Go on, tell us how, Dave

The Euro is the currency of the socialist European super state, and it’s failing. It’s nothing to do with speculators, it’s to do with a left wing government borrowing money it doesn’t have and then not knowing what to do when debt repayments exceed income. Still, it should make my holiday more affordable.

You needn’t bother coming back from your holiday, Twat Munro. This country qouldn’t miss you.

Hello Bernard – how are you ? I see they’ve let you out again……………

Well, I normally read or occasionally go out but I’m a bit tired for that so I’m trolling the web again. When you work over you don’t really want to pick up a book or anything, that’ll have to wait until the weekend now.

The drachma hasn’t existed for 8 years, so the punchline hasn’t been “oh, about 50 drachmas a day, I reckon” for quite a while.

Anyway, I think you all should go read Martin Wolf, Britain’s best columnist, because his latest says all you need to know:

http://www.ft.com/cms/s/0/3d744b46-15b7-11df-ad7e-00144feab49a.html

Titled: Europe needs German consumers

I’m not sure I understand your logic. I suppose it is something like “hedge funds = BAD, Greek people rioting in stress = BAD, therefore there must be some link?”.

Greece has totally mismanaged its finances, lied unconvincingly for years about its budgeting and now the chickens are coming home to roost. If I did the same thing on a domestic level the bank manager would call me in and close me down just the same way. Is there a parallel universe where governments can tolerate vast amounts of tax fraud and evasion, continue to pay state workers whatever they wish, AND coast along using another (solvent) country’s credit rating indefinitely?

sorry “rioting in the STREETS”