Yanis Varoufakis: Burst Greek Bubbles, Spooked Fund Managers – A Cause for Restrained Celebration

Yves here. Varoufakis describes a classic case of the old investing adage, “Little pigs get fed, big pigs get slaughtered.” In this case, the big pigs decided to ride what was clearly only a momentum trade on Greek sovereign debt, since anyone with an operating brain cell could tell that Greece was not getting better any time soon, and limited German tolerance for bailouts meant that some sort of restructuring was inevitable. The concern that the Greek bubble will be pricked sooner than expected looks to have wrong-footed some big name investors.

By Yanis Varoufakis, a professor of economics at the University of Athens. Originally published at his website

The 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.

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  1. diptherio

    You’re right, “investors flee country” should be cause for relief, seeing as how “investors” tends to be synonymous with “parasites.”

    1. Alcofribas

      Not finance as a whole is theft, when separated and controlled, some banking activities are useful : commercial and capital risks activities help money liquidity. Speculation only can make an efficient contribution to price fixing when severely controlled : as no true political will and HFT exist, regulation is a poor word for naives. Financial markets companies like NYSE Euronext, City, aso. are purely foolish…and dominate the politicians brains.
      Thats why the problem is not that cupid people exist, it is that those of us that are in charge to separate common interest of private interest do not do their job correctly and let them play with all they can find. It is in depth a political problem for democracies : who rules ?

  2. Jim A

    The “Smartest guys in the room,” always think that THEY will be the ones to slip out the door just ahead of the panic. And the longer they hold out before exiting, the more they make and the smarter they think they are. Look, it’s not like many many of the banksters involved in the RE securitization bubble and bust were under any illusion that this would go on forever. But the profits were still coming, the drinks were still flowing and they are incapable of passing up profits that are just sitting there for the taking. Until they’re not. All the pigs think they are the sharks until the roof collapses and the smell of barbeque suffuses everything.

    1. Alcofribas

      The problem is that some TBTF pigs have muted, aren’t pigs anymore. They really frighten politicians. They, politicians, have theorically supreme but only territorial local powers, while TBTF companies are “nowhere companies”. The historical place of birth of Global firms is just anecdotical : Coca-cola or Microsoft or JP Morgan aren’t US companies but global network companies. Small cleverness but huge bodies : don’t try to find a located brain to talk with, their local field is earth.
      How to rule them without a global power ? No one of 200 states can. Because UNO is still a politician baby, not a mature democracy.
      How to make it efficient enough to rule narrow minded GF’s appetites without a statute reform of UNO ? What place for Africa, China, India, Asean, aso ?
      Europe and USA, that pretend to be democracies, have no reform project. USA are a federal state, able to negociate, EU is just a club of 28 small old egoistic micro local interests, not a political power. Il looks like but isn’t (see the EU budget : 135 billions euros a year). Because international money influence on all business, particularly on finance one, today three regional powers can agree to change the world’s game of business rules : China, Europe and USA. But simply only two of them can negociate that.

  3. susan the other

    After 50 years of economic extend and pretend and hiding all our ever-diminishing returns, profits just got lapped by debt. It’s massive roadkill so nobody should be surprised that the vultures are having such a disgusting feast. It’s terminal because the “pretend” part – that there were ever any profits being made – is now exposed as a lie. And on top of that we’ve got a century of environmental clean-up to do just to get back to even. So the question is now, Where is all that stolen money gonna go to make a “return on investment?” Does John Paulson know how to do an honest day’s work?

    1. Alcofribas

      You’re right, climate changes with nature’s physical reaction and private profits are now in competition. Our problem stands here : nature is much stronger and cannot be stopped like a machine with a I/O button. Between threshold physical reactions and break-even points, long term balance of many scientific factors and short term interest for private profits, we let the second consideration rule human activities. It is a suicide and we perfectly know it.
      The key point here is private. The distribution profit model of human beings do not allow social justice as you noted, and don’t equilibrate things between private and common interests of human beings, neither short and long term life ability. Are we really “sapiens” beings ?
      The liberal economists religion just don’t accept common rules. Neither egoistic interests of States, that are ruled by home oligarchies running at their own level the same competition game between them.

  4. Alcofribas

    Making a common money without making a true federal State is a non sense. Even in the richest part of the world. First, some countries can provide false public accounts that look sane and aren’t (off market procedures thanks to GS for example) and join the zone, and then play an euphoric and unresponsible talk to their peoples ” we are rich because inside”.
    Second, no one is really inside a secured economical zone in such a money zone without Treasure policy when severe competition between members rise up : investors assets movements at light speed are completely free, just looking for the best opportunities of financial return on investment, that aren’t real investments, without any supervisor or regulator, nor global devlopment intend. Macro economical choices remain local, and some are pure fantasy. Of course Greece can not be only a tourist and maritime transport area, Spain a huge building place, aso. The liberal dogma of competitive specialization only works in specific theories, not in real life. If you just rely on two or three ressources for your own GDP, when one sector fails, the country fails. And because of competition between States members, conceived as if they were private companies, tax dumping offered to big companies becomes the rule : only individuals and small business still pay taxes, everywhere, and thus public incomes sink. But are balanced by loans, of course, in happy times !
    Third, when a global crisis arise, there is no more security for public finances either at local or continental level. If severe as a systemical banking system can be, public debts increase while a Target II mechanism between central banks also turns to nightmare for the sick countries. Not only bankers feast but strong public partners too, the other States. No way to escape, no life jacket, no hand to help.
    European politicians as a whole are the worst ever seen in the world ! Not only for their stupid decisions after october 2008, adding local regional crisis to the earth golbal crisis, but since 1992.
    Just one thing can save the Europeans : they got in 1992 with the Maastricht treaty a european citizenship, and they now have to use it to enforce to stop EU dedicated to private global firms and top investors and turn it to a real federal Democracy. No use to incriminate Germans and talk of arrogant centre and poor considered periphery, this gives guns to AfD or fascist parties eveywhere. No use to try to catch attention of PMs : they don’t ear you, Yanis ! But time has come to organize a paneuropean citizen movement of lucid persons able to overcome their old local native educations. Here is the valuable peaceful political fight.
    Then, to repair the great political fault of the money without State will be on the table, tax dumping coming to death, and a safe and sane economical policy affordable. Of course State members will loose a part of sovereignty ! But the people will smile again with a public/private equilibrated capitalism, acknowledging for the very first time what the european citizenship is good for.

  5. Lune

    The restrained celebration is only justified *if* Paulson and his hedge fund do not get bailed out of their mistakes. It is way to early to assume that; indeed, based on the past records of captured treasury depts in the US, Germany, and the EU, I’m more inclined to believe their losses will be socialized yet again.

    Why am I so pessimistic? In addition to the previous actions of 2008, 2009, etc., the political impetus to make Greece look like it’s improving is not gone. TPTB in the EU still understand that if Greece (or Italy or Spain) were to fall, it would threaten popular support for the EU, and by extension, their jobs and perches of authority and power.

    In what way would a bailout be engineered? I don’t know, and frankly, it’s not important. Where’s there’s a will, there will be a way, no matter how ridiculous or convoluted it is. And for a bureaucrat who’s grown accustomed to moving within the circles of power in Brussels or Frankfurt, spending a trillion dollars of other people’s money to keep him in those circles will still be considered money well spent.

    1. Alcofribas

      I agree with all you wrote, except last sentence. The EU problem is deeper than bureaucratic, a simple cultural habit to refuse to think and obey to hierachical orders, as stupid and unresponsible it can be. And this makes a problem for the entire world.
      EU is managed by a club of 28 heads of private governments of States members, inside the European council and with the support of the permanent European Union council. In that one you find 28 delocated governmental services of the 28 countries, that you can call 28 shadow governments, not democratelly choosen. Here are the masters of EU, European Commission and European Parliament are just democratical looking clothes put upon. A hardly structural institutional problem stands in core of EU institutions.

      Historically conceived by separated sovereign States, in the way to fuse in one cohesive power step after step, the dynamic building of integration has been stopped with Mastricht in 1992. The european fathers’ project has been thrown out by their heirs, in the name of liberal economy ideology, and for their own great pleasure to keep intact their own local powers. So the architecture of powers in Europe remains wobbly. The highest level of power is in the hands of 28 moral persons only, is not democratically tailored as european citizens want. They just can choice european deputees, but the real influence of this particular institution is very week (no right to initiate laws) and they cannot themselves join and debate in paneuropean citizens associations, and then overcome their old local narrow educations (no statute for that, no project to make it).

      Add to the picture that tax dumping between 28 States only helps private global firms, not small business ones neither captive citizens, occuring at both States and EU levels a lack of public ressources (that could be huge in fact), and you see why the greatest problem of 510 millions of citozens is not economical but political, for long. The 2007/2008 crisis only reveals it.

      Solution ? Remove purely and simply those two councils, make a simple and clear federal State with a Congress (Senate + Parliament), and use rather the german way (permanent responsability or the executive power controlled by the legislative one) to design the executive power than the US one (theorically the US Congress rules, but in fact the presidential/midterms elections can give shut down situations). Of course, State members powers will be reduced, but do you find any other way to make institutions serve the citizens rather than markets ? To negociate as equals with China or USA ? To change Chicago’s imported rules of economy in Europe in what local culture of balance between common and private interests, largely rooted in civil society wants ?

      It is a problem for the world, because Europeans don’t face their own reponsabilities, inside and outside. Inside political situation is once again unsane when fascists parties are upgrowing, because of social disaster. And the default of true representative negociation power don’t make the world safer, as it is time to make it now through a UNO in depth reform, for urgently needed climate and financial regulations.
      The lack of will of european elites is evident, collusion and corruption of democratic micro States powers runs well under the liberal rules, and Bruxelles is their private garden. But are european citizens uneducated peoples ? Why don’t they stand up for their rights in the name of european citizenship and Fundamental Rights Chart ?

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