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.