Beware of giving the Greek gifts!


The default is now official: Greece has just been given 100 billion Euros by the richer European countries. The gift was indirect: Greek and European banks have given the Greeks 100 billion Euros in terms of debt they will not claim (=a default), and the rich countries are ‘re-capitalising’ these same banks with 106 billion Euros.

100 billion Euros is a sizeable gift equal to about a third of Greek annual GDP. Since Greece is a small country, the cost can be carried by the richer European countries. But Italy and Spain are another matter: equivalent gifts to Italy and Spain would probably bankrupt the richer countries.

For me, the really interesting aspects about the deal yesterday are the other immediate financial winners of this deal: the European Central Bank and private hedge funds that bought up bank debts. The ECB bought up Greek bonds at around half their price, but is insisting it will be paid back in full. That’s a tidy profit that seems to be in the order of 25 billion euros, flowing from commercial banks to the ECB! Some of that money will be coughed up by the richer countries when they re-capitalise some banks, but some of that is a pure transfer from banks like ING which are safe and sound but who simply took the 50% cut at the time they sold their bonds to the ECB.

Whether private hedge funds who bought up bank debt in the hope that they could also insist on a 100% pay-out get the same deal as the ECB, is less certain: as I understand, it is one of those ‘details’ that will be a wrangling point in the coming weeks. Billions will ride on those details for the hedge funds involved so expect frantic lobbying. It is not really known how many bonds were bought up by hedge funds, so that too will have to emerge in the coming weeks.

What should be clear to us outside-observers though is that these are the times in which enormous amounts of money can be made by those with good intuitions for political processes. If you are a genius in how Europe’s byzantine political system works and you have the right informers, you can make an absolute killing at this moment by making the right calls on the buying, repackaging, and selling of debt. The next generation of George Soros’s are doing their deals right now and they are experts at politics. And they will be reading the tea-leaves as to whether Spain and Italy are going to be able to manage their current debt given the temptations of a bailout for them too, and if there is to be a bailout of them, what will the details of such a bailout be. As a major hedge fund manager you can make billions guessing the right answers.

2 Responses to "Beware of giving the Greek gifts!"
  1. ah but that is the point – it is NOT officially a default. Since the writedowns will be voluntary (yet to be seen if and when there will be agreement on this) it will not be a default and CDS payouts will not be triggered. One of the many ridiculous features of this very sad saga.

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