In the pre-math of the Greek collapse, conspiracy theories are swirling about who keeps blowing Greek CDS spreads wider. The answer, so far completely unconfirmed, is that a large US investment bank (we "wonder" just which US investment bank dominates the sovereign CDS market), and two major hedge funds are behind the CDS "attacks" on Greece, Portugal and Spain. According to Jean Quatremer, and his Coulisses de Bruxelles, UE blog, the plan involves blowing spreads to record levels, and is prompted by the hedge funds' anger at not having been allocated substantial amount of the recent €8 billion GGB issue, in order to lock in profits from their CDS long exposure. Being thus unhedged with a short bias, their alternative is to continue buying protection else risking to mark losses on their extensive CDS short risk exposure.
We quote from the Quatremer blog, both in original and in a hastily Google translated version:
Selon des informations fiables que j’ai obtenu vendredi, émanant à la fois d’autorités de marché et de banques, une grande banque d’investissement américaine (qui a bénéficié du plan de sauvetage des banques US) et deux très importants hedge funds seraient derrière les attaques contre la Grèce, le Portugal et l’Espagne. Leur but ? Gagner un maximum d’argent en créant une panique qui leur permet d’exiger de la Grèce des taux d’intérêt de plus en plus élevés tout en spéculant sur le marché des CDS, un marché non régulé et totalement opaque, afin là aussi de les vendre plus cher qu’ils ne les ont achetés. Pourquoi ne pas citer les noms ? Tout simplement parce qu’il s’agit d’un faisceau de présomptions qu’un tribunal risque de juger insuffisant en cas de procès. Et comme le dit un opérateur de marché : « on ne joue pas avec ces gens là ».
Here is the English:
According to reliable information that I received Friday from both authorities and market banks, a large U.S. investment bank (which has benefited from the bailout of U.S. banks) and two very large hedge funds would behind the attacks against Greece, Portugal and Spain. Their goal? Earn much money by creating a panic that allows them to demand of Greece interest rates ever higher while speculating on the CDS market, a market completely unregulated and opaque, so there also sell more than they have purchased. Why not mention the names? Simply because he is a bundle of presumptions that a court may not be sufficient in a court case. And in the words of one market operator: "we do not play with these people."
What is the basis for this "destructive" behavior? Simple- the inability to create a synthetic basis by being allocated far too little in the most recent bond issuance to hedge existing shorts. Think of it as a PIPE investor who shorts stock of a company he/she knows will give out stock at a discount to market, a practice since banned by the SEC but being done rampantly to this very day.
According to my information, the two hedge funds that hold most of the Greek market of CDS were furious at having received only 2% of the last Greek loan (launched January 25, for a period of 5 years, it has collected 25 billion request for 8 billion last survey). As they gained a lot of CDS, they needed to secure their gains (in cases of falling rates of those CDS), put in front of the paper, that is to say government bonds (so - loses a CDS, and we won on the loan and vice versa). Because they have a big problem for now, they can not sell the CDS if they would themselves fall classes. To show their strike force, and further push up CDS, they attack on Greece in creating panic, "the CDS, is a bottomless pit with 200 million dollars, you play as if you had a billion dollars, "said one market analyst. Same game for the U.S. investment bank, which hopes eventually to lend money directly to Greece became unable to borrow on the markets. Once the country to its knees, it will see the government to offer him a loan at a rate obviously prohibitive ...
And thanks to near-infinite leverage courtesy of nominal margin requirements on CDS holdings, the spillover has started to impact the FX market as well. Certiainly, if this is indeed a premediated attack, this could have been coupled with the "two funds" pushing for a lower euro, in an attempt to start the dollar carry unwind, further depressing euro levels, and creating further panic on Greek (and other PIIGS) CDS.
To increase the panic, these hedge funds and U.S. investment bank began to sell arms to turn the euro, followed by investors stunned. If the euro lower, does not mean that the eurozone will burst? What justifies the required interest rates still highest in Greece, Portugal and Spain ... Yesterday, the euro has almost reached $ 1.36 in less than two weeks, he lost dime, fifteen cents for two months. A slide that corresponds to nothing, but that side effect, provides air to the EU economy: over the euro lower, more products made in eurozone become attractive. "A very good news in this mess," quipped one analyst.
Who really wins from all this? Germany, who rumors have as saying that they are close to letting Greece go. As Zero Hedge has long speculated, a Greek failure, and a collapse in the EMU, while a significant near-term negative, will be, paradoxically, the event that saves Germany, France, Benelux, and the core of the soon to be former European Union. And yet, it is the alternative that seems to be on the frontburner for now:
It is also necessary that the Union expresses its total solidarity with the countries attacked. This is no time to recall the Maastricht Treaty, which prohibits it comes to the aid of a State member of the eurozone. If investors have the absolute guarantee that Greece will not sink, the dust settles. Germany, until very reluctant to say that solidarity begins to understand that the euro is now in danger: Thursday, Angela Merkel, German chancellor, said in Paris that he had put up "a Government economic Twenty-seven. " Berlin and Paris will therefore joint proposals at the summit on February 11. Finally, we must go further in regulating Michel Barnier, the future European Commissioner for Internal Market, confirmed to me yesterday that he intended to propose a directive on the derivatives markets (including CDS) which 80% is out of control while they represent more than 600 000 billion dollars worldwide. We must reverse this proportion.
When in doubt, blame the CDS traders.