Is Germany Acting Like a Hedge Fund?Roberto
Foa European Observer
In recent years, the German government has
been very keen on attacking hedge funds. It all
started in 2005 with Münteferings
locusts diatribe, and the current
Finance Minister Wolfgang Schaeuble has kept up
the act, most recently by demanding that funds be
placed under surveillance by
intelligence agencies. Yet, observing German
government behaviour over the last year, I cannot
help but wonder whether, in their hedge fund
obsession, maybe they have learnt some tricks of
the trade.
Where to start? First, among the activities of
hedge funds that attract them so much public ire
is accelerating a bond panic, say by short-selling
sovereign debt, and then surreptitiously buying
it back at vastly reduced prices, once the panic
has run its course. As data from the Chicago
Mercantile Exchange shows, speculators went massively
short the euro in January, and Greek debt in
particular: yet by the end of summer, just as
ordinary investors had sold out their positions
in terror of an impending eurozone collapse,
institutional investors had piled quietly
back in.
Whether by accident or design, Berlin has got
a similar deal with its own eurozone crisis
lending. In late 2009, as it became clear that
Greece had falsified its accounts and would be in
need of a bailout, the new government announced
emergency cuts and canvassed support from
potential lenders. After a slow-motion crash
which saw bond yields spike 7 months later at 12
per cent, EU member states finally agreed a
lending package that would allow Greece to borrow
from other members at a reduced rate of 5 per
cent.
Yet many forget that in late 2009 , the
yield on Greek 2-year bonds was still 4 per cent,
and that the real loss of confidence only
occurred in February when Germany blocked other
eurozone states from finalising an EU bailout
mechanism and France blocked Greece from turning
to the IMF. Had Greece been allowed to go
straight to the Fund, the country could have
borrowed at a 3 per cent SDR rate. EU member
states, led by Germany and France, precipitated a
crisis that has allowed them to force out of
Greece a rate of return a good margin greater
than what the country might have received
elsewhere. This is the kind of trickery that
would earn any hedge fund manager a very healthy
end-of-year bonus.
Likewise, there is also a strange parallel to
be found in the financing of major investment
banks, and Germanys involvement in the new
European Financial Stability Facility (EFSF).
Perhaps one of the most subtle and odious
practices since the financial crisis has been the
way that banks have recapitalised by borrowing
unlimited amounts from the ECB and the Federal
Reserve, at interest rates you or I cannot access,
and built back their balance sheets (as well as
maintain their salary structure) by lending out
at higher rates to companies and to governments (though
in the eurozone, primarily to distressed
governments). Strangely, via the EFSF Germany,
along with its other contributors, looks set to
profit from a similar kind of debt arbitrage. In
order to pay for its contribution, the ESFS is
expected to issue bonds at 3.5 per cent, and then
lend the money to countries like Ireland at a
final rate of 6 per cent; if Germany receives
compensation equivalent to its 120bn
guaranty, debt arbitrage will pocket Berlin an
additional 4.4bn a year a cumulative
400 euro windfall for every man, woman and child
in Germany over the next ten years! And this the
policy for which German voters are apparently
outraged. Many of course remain under the sad
delusion that Germany has actually given money to
Ireland, rather than simply written insurance on
a loan.
I know the German government response would be
that these loans will be very risky, and in the
event that Ireland or Greece has to default, the
German taxpayer that will foot this cost (though
I calculate a huge haircut of around 25 per cent
would be required for this Bund-EFSF
arbitrage to turn a loss). They also might
say that issuing guarantees to Greece, Ireland
and so on forces up the cost of their own debt
refinancing, though the evidence is mixed so far.
And I know that finally they might reply that if
Germany and other eurozone governments did not
step in, these countries would not find
institutional investors for their loans, and
could face a paralysing default. Even here I
am not so certain, as in addition to the IMF,
Chinas two main sovereign wealth funds have
about $700bn in total assets under management,
the Russians have at least $150bn, the Abu Dhabi
Investment Authority about $600bn, Saudis
AMA has $431bn, and Libya has another $70bn lying
spare. Some assortment of these countries might
be prepared to bail out Europes little
sovereign defaulters, if they agreed to rent out
their foreign policy for a few years.
So in exacerbating crises from which they
subsequently profit, are Germany and France
behaving like hedge funds? I, myself,
am not cynical enough to believe that they would
collude to extract a tough deal simply for their
own benefit. But I am realist enough to know that,
unless concessions are offered further down the
line, many voters in Dublin and Athens will start
to see it that way.