BF2S Forums Will carbon tax or cap and trade pass before the November Elections?

Diesel_dyk wrote:

I should have added that this would be a way to pass a VAT as well.
Same argument applies.

JohnG@lt wrote:

They didn't 'force' Greece to fail. Greece's bond failed because the underlying government is unsound. They are entirely beholden to their public sector unions so they can't make the necessary cuts to get themselves back on firm financial footing. Couple this with the fact that Greece has lied repeatedly over the past two decades about it's debt and there isn't a whole lot of trust in them to not default. Don't compare Greece to the US, we're nowhere near that level... yet, and we certainly won't reach that level in six months.

Last edited by Turquoise (2010-04-07 17:17:39)

The market pummeling of Greece continued Wednesday, and many European politicians are quick to blame "traders and speculators," as Greek Prime Minister George Papandreou recently put it.

They are missing a big part of the picture. Quick-trigger traders have certainly been active players, but the hammering of Greece and the euro reflects far more than a quest for fast profits, a Wall Street Journal review of trading records and securities filings, plus interviews with bankers, executives and traders, shows. Many of the bearish wagers have come not from hedge funds but from traditional asset managers, banks and corporate treasurers, seeking not to profit but to protect themselves.

Coca-Cola Co. and Dole Food Co., for instance, bet on a weakening euro in recent months to shield the dollar value of euros they earn abroad. Asset managers sold Greek bonds, and banks bought default insurance on those they hold in their portfolios.

On Wednesday, the yield on Greece's 10-year benchmark bond jumped to its highest level in a over a decade, Greek stocks fell, and the cost to insure Greek government bonds against default rose again. An International Monetary Fund team visited Greece, reflecting concern over a mammoth national debt—113% of annual output—that governments in Athens have spent years accumulating and sometimes masking. (Please see article on page C2.)

Greece, having spent years building up the vast debt that burdens it, has run into a new reality of the world of global trading: an avalanche of financial bets, from far and wide, on its future.

Something similar happened in 2008, just before the credit crisis. Then, the focus was shaky U.S. financial firms, with some investors seeking to exploit their weakness for profit and others rushing to try to protect themselves. This time, it's not just companies whose futures are on the line, but countries.

Several years ago, when few ever imagined a European Union member could face a default risk, insurance on Greek bonds was dirt cheap—a mere $7,000 a year to insure $10 million of Greek debt against default for five years, using the instruments called credit-default swaps.

Then came the 2008 credit crisis, making investors more cognizant of borrowers' debt loads. The financial and economic setback also saddled governments with new obligations, as they ran up bills providing financial rescues. Greece issued loan guarantees. When the dust began to settle in early 2009, a new trading pattern was evident, with investors demanding higher interest rates to buy bonds of deeply indebted countries.

Banks that owned Greek bonds began trying to protect themselves against the risk. Even a bank partly owned by the Greek government, Hellenic Postbank SA, has acknowledged that it bought credit-default swaps to protect its own holdings of Greek debt over the three months ended last September.

In October, a match was lit. A newly elected Socialist government in Greece said a revised estimate of the government's 2009 budget deficit totaled 12.5% of gross domestic product, more than triple an earlier estimate.

Within weeks, credit-rating agencies downgraded Greece's government, or "sovereign," debt, and they later downgraded Greek banks as well.

In late November, Dubai sought to delay debt payments owed by its Dubai World conglomerate, making investors keenly aware of government-bond risk. An array of financial firms launched bearish bets against Greek bonds and the euro, too, seeking to profit or to protect themselves.

The traders included not just hedge funds but traditional investors such as insurers and asset managers that handle pension money. Christopher Iggo, a fixed-income specialist at the investment unit of French insurer AXA SA, ranked countries by credit risk, then he and his team in London's financial district cut back holdings of Greek debt.

In Tokyo, Kokusai Asset Management Co., in offices overlooking the outer moat of the Imperial Palace, sold its entire $2.2 billion portfolio of Greek government bonds in mid-December.

Another traditional investor, Payden & Rygel, a Los Angeles firm that manages more than $50 billion for institutions and individuals, decided in November to dump its holdings of Greek bonds, says bond chief Kristin Ceva. The firm later bought more debt.

In a sign of how worries about Greece were bleeding into the euro, Payden & Rygel's currency strategists in December used derivatives known as forward contracts, in a wager that the euro would weaken against the dollar in coming months.

Some central banks also had begun to avoid the European common currency. The central banks in emerging nations apart from China and Russia—banks that had placed 30% of their new reserves into the euro in the second quarter of 2009—put none of their new money into the euro in the third quarter, according to Barclays PLC.

Anti-euro investing was already months old for one big hedge-fund firm. Inside the offices of GLG Partners LP in the Mayfair district of London, Lebanese-born trader Jamil Baz bet had some $100 million in March of 2009 that the euro would lose ground against emerging-nation currencies such as the Taiwanese dollar, Korean won and Indian rupee. After taking some profits, GLG still holds the position. "There are a lot of countries in Europe for which the fiscal adjustment will be extremely painful," Mr. Baz says.

Far from trading desks in London and New York, some multinational corporations had reasons of their own to make negative bets on the euro. Coca-Cola generates euro income equal to roughly $3 billion a year. Coke needed to protect the value of that revenue when it was converted into dollars.

At Coke headquarters in Atlanta, the volatility in the euro—its value ranged from $1.26 to $1.51 during 2009—was making decisions difficult for the company's treasury office. By late 2009, to protect itself against a euro that had begun falling, Coke was using put options, which gave it the right to sell euros at a given price for a given period. Their value would rise if the euro fell further. A company spokeswoman said it hedges its euro risk each year.

In Westlake Village, Calif., Dole Food made a similar move, hedging 50% of its euro cash-flow exposure, company officials say. Dole said it operates a regular hedging program.

International traders can see the level of these negative, or "short," positions on a currency, so this kind of trading also can sow concern and bolster the doubts that led to it.

In late January, the Greek government, scrambling to raise money with its budget in deficit and bonds set to mature soon, sold a €8 billion issue of new five-year bonds. But within days, those who bought the bonds saw their value fall 3.5%. As doubts about Greece grew, the cost of insuring its debt against a default soared. The annual cost to insure $10 million of Greek government bonds against default for five years had been $124,000 at the start of October. By November, it was $208,000, and in February it reached $425,000.

Hedge funds have taken heat for driving up the cost of credit-default swaps on Greece, and thus enhancing other investors' worries about the Aegean nation. While some certainly have done so, other hedge funds were doing the opposite—selling the swaps.

One fund called Balestra Capital Ltd. in New York had anticipated trouble in Greece as long ago as late 2005, and got in early. Balestra's James Melcher was anticipating trouble in the U.S. housing and mortgage market, and expecting that the resulting economic slump would eventually punish highly indebted governments.

Mr. Melcher, a former Olympic fencer, had named Balestra after a fencing maneuver. Now he and his partners began buying credit-default swaps on hundreds of millions of dollars of bonds issued by European governments, including Greece.

The credit insurance "was so cheap it didn't matter if we were wrong," says Mr. Melcher.

Early this year, Balestra began calling dealers and offering to sell a large chunk of the fund's now-much-more-valuable credit-default swaps. In other words, this hedge fund's trading was tending to lower the price of insurance on Greek debt, arguably making investors less concerned about Greece rather than more.

Sometimes it was more-traditional investors doing the trading that critics assail. Banks, for instance, often bought credit-default swaps on Greece. They did so, in part, simply because they had property to protect—their holdings of Greek bonds.

Traders say buyers of credit-default swaps in late 2009 and early 2010 included Goldman Sachs Group Inc., Barclays, Spain's Banco Santander and France's Credit Agricole SA. According to the traders, Credit Agricole bought insurance to hedge exposure to Greece as well as Italy, Germany and the U.K.; Banco Santander protected British, German and French trading positions; and Barclays hedged its exposure to Italy, France, Greece, Germany and Portugal.

A Goldman spokesman said the firm "has bought some credit protection, but we are exposed to loss in the event that Greece's credit-worthiness deteriorates." Santander, Credit Agricole and Barclays declined to comment.

Throughout this time, bearish euro trading had been picking up steam. It finally resulted in a record level of futures and options bets against the euro, according to the U.S. Commodity Futures Trading Commission. By Feb. 9, Chicago Mercantile Exchange contracts betting on a decline in the euro against the dollar outnumbered positive bets by a record of over 54,000, according to CFTC data.

Coke's 2009 moves to protect its revenue in Europe against a weakening euro were looking good. The currency's slide meant Coke's put options had increased in value. Finance chief Gary Fayard spoke to investors about the euro in early February. The company, he said, was "protected against the downside."

On Wednesday, Greece's cost of borrowing for 10 years was more than four percentage points higher than Germany has to pay, a gap that last fall was just 1.3 points.

In Stamford, Conn., Ronald Joelson is looking to the next sovereign-debt target. The chief financial officer of insurer Genworth Financial Inc. is examining whether to buy swaps insuring against a default by Spanish and Italian debt. He says he isn't trying to speculate. With about $70 billion in global investments, Genworth owns debt issued by financial firms in both countries. If conditions worsen, his company could lose money on that.

JohnG@lt wrote:

Diesel, you blame 'speculators' for Greece's problems but it wouldn't be in this situation in the first place if it hadn't racked up the debt.

Last edited by Turquoise (2010-04-08 16:53:23)