Lambert here: What sort of miracle, now, that’s the question. Sorry to be “All Greece, all the time!” but readers do seem interested….
By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street.
After chaotic emergency meetings, this weekend culminated, for this Greek banking system, with an ECB press release that contained this harmless-sounding but deadly line:
Emergency liquidity assistance maintained at Friday’s (26 June 2015) level.
It meant no more cash for Greek banks from taxpayers of other countries, no more cash for Greeks depositors to withdraw and stuff under the mattress. Banks were now illiquid. They’ve been insolvent for a long time. Only the fresh cash, recently supplied on a daily basis, has kept from toppling altogether. What has been rumored since June 18 has become reality: the banks are toast [read LEAKED (Denied then Confirmed): ECB Not Sure If Greek Banks Can Open Monday].
Greek Prime Minister Alexis Tsipras got on TV and announced that his government decided to close the banks for over a week, impose capital controls, and close the stock market for as long as banks are closed. When – or if – they reopen on Tuesday July 7, it will be to a different world.
He blamed everyone but his inept government and the silly game theory or whatever they’ve been pursuing. Tsipras also appealed for calm and tweeted this Cyprus-like promise:
The bank deposits of the Greek people are fully secure.
On Monday, the US-listed Greek ETF (GREK), a substitute measure for the closed Athens stock market, plunged nearly 20%, an indication of where the already battered Greek stocks might be headed. The ETF was started in crisis-year 2012, as part of the early hype to invest in Greece. It’s down 61% from its peak in March 2014. Greek bonds too plunged in value, with the 10-year yield shooting up over four percentage points to 15.1%, the highest since 2012.
Jean-Claude Juncker, back on May 19, 2014, when he was “campaigning,” as he said, for the presidency of the European Commission, gave a speech in Athens, where he proclaimed: “I take it as a call for the new Commission President to reunite Europe after the crisis.” The crisis was long over, and now it was time to move forward under his leadership.
He then tweeted: “I say to all who bet against Greece and against Europe: you lost and Greece won. You lost and Europe won.”
But by that time, hedge funds were already betting on, not against, Greece. With ceaseless hype during 2013 and 2014, they inundated the media with their buy-Greece meme, how Greek markets would rally as the reforms would push the economy forward, how banks, stuffed to the gills with more bailout money, would get back on their feet, and how Greeks would somehow become confident that their banks were solid. This hype about Greek stocks, bonds, and a myriad other “opportunities” become so deafening that the ultimate smart money started believing it themselves.
Now, as the New York Times reported, they’re panicking….
I just can’t believe these guys are willing to torch their own country,” one investor with a large holding of Greek bonds lamented in an email. “They thought this was a game. Now, when the supermarkets run out of food, gas stations run out of gas, hospitals have no medicine, tourists flee, salaries don’t get paid because banks shut — what are they going to do?”
During peak hype a year ago, there were perhaps 100 hedge funds plowing what they thought was fertile financial soil. But when things began to curdle again in late 2014 and in 2015, many of them bailed out, selling what they could.
But 40 or 50, according to local broker estimates, kept their bets and hopes alive that it would all get worked out somehow, that the ECB or Germany or whatever would swoop in and allow them to make a killing, as they’d done with Greek bonds in 2012. So these funds have about $11 billion stuck in these shut-down Greek markets. The Times:
The largest investors include Japonica Partners in Rhode Island, the French investment funds H20 and Carmignac, and an assortment of other hedge funds like Farallon, Fortress, York Capital, Baupost, Knighthead and Greylock Capital.
A number of hedge funds have also made big bets on Greek banks, despite their thin levels of capital and nonperforming loans of around 50 percent of assets.
They include Mr. Einhorn at Greenlight Capital and Mr. Paulson, both of whom have invested and lost considerable sums in Piraeus Bank. Fairfax Financial Holdings and the distressed investor Wilbur Ross own a large stake in Eurobank, one Greece’s four main banks.
Big positions have also been taken in some of Greece’s largest companies. Fortress Capital bought $100 million in discounted debt belonging to Attica Holdings, Greece’s largest ferryboat holder. York Capital has taken a 10 percent stake in GEK Terna, a prominent Greek construction and energy firm.
In 2014, Blackstone’s credit arm bought a 10 percent chunk of the Greek real estate developer Lamda Development. And Third Point, one of the earliest, most successful investors in Greek government bonds, has set up a $750 million Greek equity fund.
Among the most dubious of these was a 10 percent equity stake, then worth about $137 million, that Mr. Paulson’s hedge fund took last year in the Athens water monopoly. The company had little debt and was set to be privatized, making it an attractive prospect at the time. But the privatization process is now frozen, and the monopoly is struggling to collect payment on its bills from government entities that are nearly broke….
Now Greece’s financial system is shut down to control the chaos. Parts of the economy are shut down with it. Greek banks had already been reduced to penny stocks before the bank holiday, confounding these hedge funds that had invested in them. Now, they’re cutoff from the lifeline that has kept them from toppling.
“People are freaking out,” Nicholas Papapolitis, a corporate lawyer in Greece who has led some of the largest hedge-fund deals in the market, told the New York Times. He was working through the weekend, comforting and cajoling his frantic hedge-fund clients. “They have made some really big bets on Greece,” he said.
They weren’t betting on Greece, however. They were betting on the ECB, the European institutions, and taxpayers – as they’d done in 2012, when they’d made a killing – to shovel money their way. Only this time, it didn’t happen, leaving the ultimate “smart money” to twist in the wind.
But here is the thing: the Greeks could have solved the crisis on their own, if they’d wanted to. Or did they know something that others didn’t? Read… If Greeks Did This, the Terrible Crisis Would Be Over