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Your Usual Table, Mr. Papagiorgio?
It would appear that European leaders are back at their usual table.
Speaking at the Bookings Institute before meeting with the US
administration, Greek Prime Minister George Papandreou blamed
“unprincipled speculators” and “ill-regulated” financial markets for
pushing Greece to the brink of financial ruin and dragging down the
euro. Along the way he convinced France’s Nicholas Sarkozy, that
another financial crisis is around the corner if the CDS market is not
curtailed. Sadly, we agree with the conclusion, but many European
“leaders” are confusing cause and effect. Keith McCullough, at
Hedgeye, explained it best yesterday when he said, “markets don’t lie;
politicians do . . . hearing politicians talk about markets is like
watching a southern belle try to ice fish.”
So let’s set the
record straight. CDS trades are not the cause of Greece’s problems.
Profligate government spending is the 800 pound gorilla jumping up and
down in the center of the Parthenon. We wonder how Mr. Papandreou
would respond if asked to imagine that the Greek public debt ratio was
50% instead of 135% and the Greek budget deficit was 5% or 6% (or even a
surplus heaven forbid) rather than 12.8%. Would insurance against a
Greek default cost north of 300 bps and would Greek government interest
rates be trading at elevated levels and rising in this unfathomable
scenario? We think not.
We’d like to briefly review our
“principles” for the benefit of Greece’s PM. We are a small family
office in North Carolina, entrusted with protecting family wealth and
growing it prudently for future generations. We are also
fortunate enough to do the same for a few other families that share the
same objectives and same values. Believe it or not, when we lend (i.e.
invest) our money to businesses – and governments – we expect to get
it back (and occasionally earn a respectable return over time). We
have a fiduciary obligation to look after the pool of capital entrusted
to us and work hard to earn our investors a consistent rate of
return. As Papandreou and Company go cup in hand on their global PR
tour blaming “unprincipled speculators” for their own fiscal
recklessness, we ask how many of these so-called, evil investment
managers have been bailed out with tax-payer dollars during this Global
Recession. And we’d encourage Mr. Papandreou to consider the
following “principles” as Greek actions speak louder than words:
- As
early as 2001, just after Greece was admitted to Europe’s monetary
union, Goldman helped the government quietly borrow billions, hidden
from public view because it was treated as a currency trade rather than
a loan. This allowed Athens to meet Europe’s deficit rules while
continuing to spend beyond its means. - Greece entered the
monetary union with bigger deficits than permitted under the treaty
that created the currency. Rather than raise taxes or reduce spending,
the Greek government artificially reduced their deficits with
derivatives. Ironic how the same politicians are blaming derivatives
for the problems they created. - Aeolos, a legal entity created
in 2001, helped Greece reduce the debt on its balance sheet. As part of
the deal, Greece got cash upfront in return for pledging future
landing fees at the country’s airports. A similar deal in 2000 called
Ariadne devoured the revenue that the government collected from its
national lottery. Greece, however, classified those transactions as
sales, not loans, despite doubts by many critics. - Then in 2002,
accounting disclosure was required for many entities like Aeolos and
Ariadne that did not appear on nations’ balance sheets, prompting
governments to restate such deals as loans rather than sales. - After
numerous downward budget revisions, the recently appointed “Committee
on the Reliability Of Statistics” uncovered $40 billion of previously
hidden debt. Per Zero Hedge, “the findings
indicate that the possibility of political interference is mainly
associated with the close relationship of NSS with the Ministry of
Finance and the inability of the General Accounting Office to work
independently and responsibly.”
George, George,
George. We wonder exactly what is “principled” about levering-up your
country’s balance sheet to 135% debt to GDP, with a 12.8% deficit and
them blaming others for your problems? Take a look at the recent piece
by GaveKal which clearly demonstrates
that markets are, indeed, efficiently pricing the risk in government
balance sheets. There is nothing speculative about it.
The
reality is that, politicians having failed at the task, financial
markets have now become the best ally of the Euro’s founding fathers. Indeed,
since the beginning of the year, sovereign spreads have been nearly
perfectly aligned with the level of fiscal constraint imposed by the
Maastricht Treaty to each country of the Eurozone. In other words, the
market is doing the job that policymakers could not tackle.
The fiscal data
presented on the table above helps us to understand the current
structure of bond yields in the Eurozone. Working with publicly
available official data rather than with potentially opaque in-house
assumptions, we obtain a very good fit (97% correlation) between actual
bond yields and a small number of key variables. Thus, for all of the
complaints about market manipulation, it seems that the hierarchy of
spreads over German Bunds has followed, since the beginning of this
year, a pretty rational walk. Actual debt levels and short-term
pressure on government accounts have systematically explained more than
85% of yield spreads. When a liquidity risk premium is applied,
the explaining power of our model rises to above 95%.
While visiting US President
Barack Obama this week, Papandreou urged that “Europe and America must
say ‘enough is enough’ to those speculators who only place value on
immediate returns, with utter disregard for the consequences on the
larger economic system.” We can almost visualize those cynical
speculators letting it all roll. Yet, we’d much rather invest for
long-term returns, with a focus on capital preservation, than bet on
the politicized strategy of piling debt, upon debt, upon debt. Believe
it or not, it appears that White House officials sent George packing,
recommending that Greece focus on righting its economy and dealing with
its own debt problems. There is hope!
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re: "markets don’t lie; politicians do .. "
unfortunately, it's not that simple, of course; many market participants lie - even mortgage reviewers & ratings agencies
liars can easily accumulate anywhere, at any time - it's known as the generalized Gresham's Dynamic
Good piece. We have just finished running our Greek fiscal model giving them all of the (practical) benefits of the doubt possible. The result? There is no way in hell they will be able to cut their deficit to the extent that they allege. Even if they were, they would plunge the economy (deeper) into recession, or worse - although it looks as if it may end up that way regardless.
The assumptions made by the Greeks in their "austerity" measures are WILDLY optimistic, thus even when attempting to give them the benefit of the doubt, there were places where we simply had to draw the line. In addition, it looks as if they will be significantly stressing their banks and putting them at a significant disadvantage as compared to the other EU institutions.
It appears as if nobody has actually read what Greece put out, because if they did their bonds would have another 100 basis points or so tacked on top.
Let’s set the record straight,
for 5 billion loan Goldman got comms only at hand 7% (350mil)and still checking for the balance. Got cornered and some rotten piece of shit politicians and try squeeze from all sides. spare me mate
One man's evil speculator is another's courageous bond vigilante.
I know Martin Wolf is a Keynesian but I have to agree with him today(Financial Times 10 March) that the fiscal side of things were never the problem for the peripheral EU countries although Greece had more governmental spending then Spain or Ireland.
It was huge monetary transfers of German savings that were a wet dream for the local hick bankers - no society except Germany would be able to cope with such tempting fruits.
Although he does not say as much as he is a creature of the bankers but I believe the chief responsibility for this mess lies with the ECB.
Politicians at least Irish Politicians have no concept of economics and their civil servants are not much better as they were advised by the international bankers.
This was a deliberate and successful attempt by the banksters in Frankfurt to crush us into oblivion - the fiscal spending is only now used to clean up the casualties from a monetary war on these primitive nations.
Strip the productive assets, flick the people away like dried seeds once their accounts are drained and tied to the central debt/tax machine? Have we seen this movie before?
Greece is the walking dead, financially and culturally. But don't listen to me, I am one of those "speculators" who viciously expects to get his money back from bond issuers.
I like the part of his Brookings talk where he gets to the real crux of the matter, namely the expense of rolling all that maturing debt - and all those "investors in Greek sovereign debt" back when Greece enjoyed artificially low borrowing costs due to its ongoing balance-sheet fraud have suddenly morphed into "speculators and rumormongering market manipulators" now that the jig is up and they are demanding higher interest rates:
Quote:
[I see that threat every day as we manage this crisis, for the immediate problem we face is not dealing with the recession but in servicing our debt. Despite the deep reforms we are making, traders and speculators have forced interest rates on Greek bonds to record highs. Many believe that there have been malicious rumors endlessly repeated and tactically amplified, that have been used to manipulate normal market terms for our bonds. Partly as a result, Greece currently has to borrow at rates almost twice as high as other European Union countries. So when we borrow 5 billion Euros for 5 years, we must pay about 725 million Euros more in interest than Germany does.]
Sounds more than fair to me, especially in the wake of the revelations about Greece`s decades-long accounting scammery. And now we get to the (unintentional) laff-riot part of the talk:
Quote:
[It would be like let’s say California having to borrow at a rate with 5 billion Euros which would mean that they would have to pay 725 million U.S. dollars more than another state in the U.S. And when you have a common currency that is simply not viable. So we will have a very hard time in implementing our reform program if the gains from our austerity measures are simply swallowed up by prohibitive interest rates.]
So his argument here boils down to this: Germany gets to borrow at 3%, and despite Greece`s budget being a nightmare flood of red ink compared to Germany`s, Greece deserves to borrow at the same low rate because it is part of the same currency union, just like California gets to borrow at below-market rates because it is part of the Mighty Dollar Union, or something ... good grief. The Greek PM is apparently blissfully unaware that, like the various EU member countries, U.S. states get to borrow at rates reflecting the market`s perception of their *individual* balance sheet strengths (by way of credit ratings set by the well-known players in that field), that California`s credit ratings has plummeted to "junk" status in the past year, and its borrowing costs reflect that. How do you say "Good grief! Buy a frickin` clue, already!" in Greek?
and our society ? now there is cheese made from breast milk !! on CNN..
and the corrupt nature of greeks themselves...lets put blame everywhere but ourselves.
the greek society has broken down, this can't be papered over.
If markets were so "efficient at pricing risk" they would have priced it in Greek sovereign debt woes a long, long time ago. Fear & greed are the only two things that remain constant.
"Does the gentleman feel lucky?"
Nice read thanks.