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THERE IS NO SURER SIGN of desperate and ultimately failed leadership than to blame its plight on short-selling speculators.
As part of this hoary tradition, inept or corrupt leaders attempt to demonize those who would profit from the crisis of their making. So, they affix such nonsensical labels as "Gnomes of Zurich" or "Sith Lords" to the evil short-sellers in a pathetic attempt to deflect attention to the real causes of the debacle befalling their companies or countries.
The U.K. Labour government of the 1960s condemned international money speculators as the cause of the 1967 devaluation of sterling, a theme that was reiterated by President Nixon when he suspended the convertibility of dollars into gold in 1971. It wasn't their deteriorating fiscal deficits that were to blame, but speculators -- who correctly deduced the effect of those deficits.
And the perennial scapegoats for any crisis related to money are, of course, the Jews. At the height of the Asian financial crisis in the late 1990s, Malaysian Prime Minister Mahathir Mohamed blamed the Jews in general and hedge-fund manager George Soros in particular for the 40% plunge of the Malaysian ringgit. Soros had previously gained fame for reportedly making $1 billion in 1992 when Britain was forced ignominiously to withdraw from Europe's Exchange Rate Mechanism, the precursor to the euro.
So, it should come as no surprise that Greek intelligence authorities were reported to be investigating nefarious speculators who supposedly have been shorting the government's beleaguered bonds.
Last Friday, a report in a Greek newspaper, To Vima, stated the National Intelligence Service of Greece, identified the "tip of the thread" in the tangled web of speculation against Greek government debt, according to the translation that my colleague, Dimitra Defotis, forwarded.
This account -- which Dimitra says appears to be more like an editorial, as much of Greek journalism is -- names Paulson & Co., Brevan Howard Asset Management, Fidelity International and Moore Capital Management as having "massively" sold bonds daily since last December.
Later, a Greek government official denied the intelligence agency was investigating market participants. "But beyond that…we are trying to ascertain, by the best possible way, where these speculative games are coming from, while recognizing that the only solution, the only antidote to this kind of speculation, is a steady policy which continue to follow by implementing our stability program," he added.
Brevan Howard, Europe's largest hedge-fund group -- which To Vima said reaped significant gains when the spread on Greek bonds exceeded 300 basis points (presumably relative to benchmark German bunds) -- said in a letter it has not had short positions in Greek bonds since mid-December, and has no plans to short the bonds or buy credit-default swaps on Greek debt, according to Reuters.
Moore Capital, the major hedge fund headed by Louis Bacon, told investors it had a long position in Greek debt in the expectation of a European bailout of Greece, according to Bloomberg News. Meanwhile a Fidelity spokesman said its international bond funds do not actively short any government debt other than as hedges, Reuters added.
Paulson, the hedge fund manager that reportedly made $1 billion or more by effectively shorting subprime mortgage securities, was said by To Vima to have shorted Greek debt after having met with the government last year. So far this year, however, he's been on the losing end of a big bet on gold.
The blogosphere is full of insinuations that Paulson was working with Goldman Sachs (ticker: GS), which would have had first-hand knowledge of Greece's true debt situation from having arranged the now-infamous debt swaps in 2000 and 2001.
Gerald Corrigan, a Goldman managing director and former president of the Federal Reserve Bank of New York, said of the deal Monday "there is nothing inappropriate and it was in conformity with existing rules and procedures" of the time. But Corrigan added in a statement to a British parliamentary committee, "with the benefit of hindsight…the standards of transparency could been and probably should have been higher." Moreover, the reduction in Greece's debt-to-GDP ratio was "rather small, but not insignificant," he added.
As French Finance Minister Christine Lagarde exhorted governments to put up a united from against "speculators" shorting government bonds, the bailout that Moore Capital's Bacon is betting on hasn't come through. European Union and German officials over the weekend denied reports that a 20-25 billion-euro ($27 billion-$33.7 billion) bailout for Greece was being drawn up. Meantime, Agence France Presse said an International Monetary Fund staffer was in Athens to help assist the EU deal putting together a Greece deal.
If anything, shorts in Greek debt -- to the extent they still exist -- are getting squeezed. Amid indications that the Hellenic Republic actually may be able to issue a small amount of 10-year bonds in the market, prices rose and yields fell Monday. The cost of insuring Greek debt has stabilized in the CDS market at around 350 basis points ($350,000 annually) for five years, down sharply from a peak of 428 basis points at the beginning of the month.
Still, nothing has been resolved. The bull case for Greek bonds is, as Moore Capital indicates, says is based on a bailout. If it's not forthcoming, the bonds are a sale. And if it does come through, one has to wonder who's next. That's what those evil speculators are pondering, too.
Comments: randall.forsyth@barrons.com
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