Ever since the Greek financial crisis broke out in October 2010, hedge funds have played it as a formidable money spinner.
They were able to do that because they understood what most analysts could not fathom in an ill-tempered, illogical and absurdly ruinous intra-European mismanagement. To this day, hedge funds’ lucrative Greek bets serve as a mirror of European mistakes.
Instead of moving swiftly to get Greece back to sound public finances, the Europeans continued to dilly-dally while their nostrums got the Greek public debt soaring from 128.7 percent of gross domestic product (GDP) in 2010 to an astounding 184.1 percent last year — with a shocking 25.6 percent unemployment rate to boot.
Germany now apparently believes that the Greeks have been softened enough to deal. Last Friday, the German chancellor called for an agreement between Greece and its creditors (the EU Brussels Commission, the ECB and the IMF) before an emergency euro area summit on Monday.
What’s behind the deal?
That is sweet music to hedge funds’ ears. Brad Pitt and Angelina Jolie will also be able to buy the Gaia Island – a 43 acres pad of pristine beauty – for less than the cost of housekeeper’s quarters in Malibu or Bel Air.
As things now stand, an acceptable trade-off between Greece’s concessions (on pensions, public sector wages and indirect taxes) for the primary budget deficit target of about 1 percent of GDP and creditors’ further financings has been reached. Scuttling the deal by insisting on additional measures of fiscal austerity that would prolong Greece’s recession, heart-breaking poverty and its irreversible debt trap would be an incredibly misguided statecraft.
That is still possible, though. But I think the chances of such a debacle actually happening are rather small for reasons hedge fund artists understood all along.
First, pushing Greece into an unnecessary default would aggravate the existing fissures within the monetary union as hedge funds eagle eyes continue to scan and pick other low-hanging fruits. These are highly indebted, largely unreformed and politically unstable countries facing socially intolerable unemployment and deepening poverty. These countries now represent 50.8 percent of the euro area. And you know who they are.
Those who think that the ECB can “defend” the euro area by monetizing these countries’ growing public debt ad infinitum are making an incongruous economic argument and an utterly wrong political reading.
Indeed, even if that were possible, how would such a free-flowing and open-ended “quantitative easing” be cheaper than a comparatively tiny, highly conditional and temporary financial help to Greece?
And how would that avalanche of direct and indirect (i.e. via commercial banks) ECB government financing square with existing treaty provisions and supercilious euro area hard-money taskmasters? You also know who these are.
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Second, would the French president and the German chancellor be ready to shoulder the historical responsibility of pushing Greece into a chaotic default that would inexorably lead to the euro area deconstruction and, most probably, to the end of the European Union – a precarious edifice carrying the noble promise of peace and prosperity for a continent that suffered the worst human slaughters the world has ever known?
These two politicians know what is at stake. And so do hedge funds.
West’s security architecture
Third, by its geographical position in Eastern Mediterranean, Greece is the key component of the Western security and defense systems. In an earlier column published last April, I copied from the NATO website the alliance’s military installations located in Greece. Here they are again.
Greece is hosting the NATO Deployable Corps Greece in Thessaloniki, the Combined Air Operations Centre in Larissa, the Multinational Peace Support Operations Training Center in Kilkis, the NATO Maritime Interdiction Operational Training Centre at the naval base of Souda Crete, NATO Missile Firing Installation, Athens Multinational Sealift Coordination Centre and the Naval Base of Souda.
Do you hear Washington’s heavy breathing down the Europeans’ necks?
Following up on President Obama’s earlier warnings, the White House called on Europeans last Friday to prevent Greece’s default, and to set up conditions for the country’s sustainable economic growth. A day later, the U.S. Secretary of the Treasury Jacob J. Lew reiterated the same call. You can imagine what is going on behind closed doors.
Greece’s NATO partners seem to have finally realized that a warm welcome the Prime Minister Tsipras received last week during the St. Petersburg Economic Forum in Russia (his second visit to Russia since taking office in January) was going a bit beyond the usual negotiating theater with intransigent creditors.
The Kremlin promised help whenever Greece might ask for it, Russia agreed to finance a $2 billion gas pipeline connecting the ‘Turkish stream’ to the Greek hub, and Athens was invited to become a full member of the BRICS Development Bank scheduled to begin operations on July 7, 2015.
Closely tied to this extraordinary offer, China is looming with investments in Greece’s two largest ports of Piraeus and Thessaloniki, where China Ocean Shipping Company (COSCO) already handles most of the cargo traffic. That is part of China’s Maritime Silk Road, planned to connect to Central and Western Europe via a high-speed rail link originating in Greece.
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It is about time for Europeans to stop their weekly announcements of the “last chance” negotiating sessions. Greece needs an agreement to end its economic and financial nightmare. Getting Greece back on a path of sustainable economic growth is the only way the country will be able to control its public sector accounts and to finance debt obligations in an orderly fashion.
Greece will strike up a passable deal with its creditors.
Hedge funds’ investments at the time of a large excess supply of Greek assets will be hugely profitable. Their European fiesta will continue. These bad policy-seekers will keep thriving on Europe’s apparent inability to fix its economies.
Growth-enhancing investments – domestic and foreign – in the euro area require the end to crisis management improvisations. The monetary union’s fiscal and monetary management must be strengthened to provide a stable and predictable economic and political environment. Unforgivable waste of enormous resources in the Greek case shows the urgency of such a change.
Sadly, I don’t see that happening, because such changes imply a degree of sovereignty transfers the nation states don’t seem ready to concede.
The hedge funds know it, but the rest of the investment community should be reminded of this: the ECB is the only stable point of policy reference for the euro area.
Michael Ivanovitch is president of MSI Global, a New York-based economic research company. He also served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York and taught economics at Columbia.