Attacking Speculators Is Good Politics

Tracy Corrigan Daily Telegraph March 12, 2010

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Friday 12 March 2010 | Financial Crisis feed

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By Tracy Corrigan, Assistant Editor Published: 6:30AM GMT 12 Mar 2010

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Admittedly, it's not exactly what he was hoping for: Nicolas Sarkozy, Angela Merkel and Barack Obama have not decided to dip into their pockets to help the debt-hobbled Greeks out of their dire predicament. But under the circumstances it is a triumph. Mr Papandreou has won unanimous support for a brilliant new plan: to blame the speculators.

In his meeting with Mrs Merkel, Mr Sarkozy and Jean-Claude Juncker, the Luxembourg prime minister who chairs the Eurogroup, I had naively imagined that the focus would be on Greece's unmanageable deficit, its ongoing financing difficulties, and the potential disaster for the Eurozone if these problems are not resolved. But sensibly enough that stuff can get pretty technical and there was never much hope of persuading them to cough up – Mr Papandreou steered the conversation towards smoother waters. Aren't those speculators a disgrace, betting that Greece will default on its debt? Most assuredly so, Prime Minister, dreadful people. Perhaps, then, we can agree to launch a bold initiative to clamp down on these devils who target sovereign debt? Oh yes, prime minister, what an excellent idea.

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Then it was off to America to win Mr Obama's support for the combat against "unprincipled speculators" who have unsettled the markets, threatening a new global financial crisis. "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," he said in a speech in Washington.

As diversionary tactics go, the call to take arms against speculators is a good one. It's not terribly subtle but then diversionary tactics, by their nature, can't afford to be, and this was certainly a better try than Basil Fawlty's old trick of throwing himself to the floor, jumping up, and announcing "Sorry I fainted." The trouble with such ploys is that they do not distract from the issue in hand for long. Yesterday, 10,000 Greeks took to the streets in a nationwide strike which grounded flights and brought public transport.

But Mr Papandreou's knew his anti-speculator rhetoric would chime well with the French and Germans, who last year pushed for tougher regulation of hedge funds through the European Alternative Investment Fund Managers directive, which is currently staggering through the Brussels legislative process. Its 1,669 amendments, to date, reflect its sorry state. This is the danger of politically motivated clampdowns, designed to shift blame for excessive borrowing – or defective regulation – away from governments. In the process, unintended or undesirable consequences include a rift with the Americans, who claim, rightly, that the directive discriminates against US funds.

It is worth deciding, before legislating, what exactly the problem is. Are speculators destabilising the Greek debt market through their use of credit default swaps, as is alleged? Er, no. The net volume of outstanding CDS contracts has not changed since January; according to Bafin, the German financial regulator, "the market data do not show massive speculation" in credit default swaps. In fact, some of the more active CDS traders appear to be French and German banks, which find themselves holding a lot of Greek debt. The real pressure on Greece to pay more for its debt is the result of higher bond yields, which preceded any movement in CDS prices. True, hedge funds may be trading in the bonds, but no group of hedge funds – or even the entire combined value of all hedge funds – would be able to cause a country to default, if its fiscal position were sound.

Secondly, is more transparency desirable in the derivatives market? Yes, as are better arrangements for clearing which are on the way. Recent history has clearly shown that excessively complex financial instruments that allow companies to hide risk off-balance sheet (AIG, Enron et al) are dangerous for shareholders and taxpayers alike.

Thirdly, should speculation sometimes be curbed? Again, yes. Hedge funds access to leverage may give them excessive p

By Tracy Corrigan, Assistant Editor Published: 6:30AM GMT 12 Mar 2010

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Thirdly, should speculation sometimes be curbed? Again, yes. Hedge funds access to leverage may give them excessive power. Shortselling of bank stocks can rapidly undermine the confidence in their ability to finance themselves, upon which they are so reliant. And it is vital to ensure that the taxpayer is not underwriting any of these bets - or on the other side of them.

But taking a view and losing money if that bet is wrong is a vital element of healthy markets. Recent pressure on sterling may be worrying, but it may also help ensure politicians take the necessary action to tackle the deficit.

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Comments: 1

Good article again. Speculators do play a role in showing weaknesses, provided that role is not sufficiently large that it promotes chaos. 'to hide risk off-balance sheet': could someone remind me how much government debt is currently off-balance sheet?