It's Getting Absurd: Greece Speculated Against Itself

Tuesday, March 23, 2010

Is Greece the bad boy in the Euro club? It very much looks like it. A report from Greek website ekathimerini.com may fuel the ire of its Eurozone buddies. After cheating its way into the Euro the Hellenic Republic has speculated against itself by buying CDS on Greek sovereign debt through state controlled Hellenic Post Bank (TT) in 2009, pocketing a profit of €35 million, it was reported(Hat tip Edward Hugh):
State-controlled Hellenic Post Bank (TT) spent nearly 1 billion euros last year to secure its positions against the possible bankruptcy of the Greek government, according to documents seen by Kathimerini.

In August, the bank bought credit default swaps (CDS) – a form of insurance on financial instruments – worth 950 million euros when the spread on the Greek five-year bond over the German Bund was at 135 basis points.
CDS products allow investors to purchase protection against the default of debt issued by governments, hedging existing positions.
TT’s management, which changed after the Socialists took power in October, sold the CDS when the spread was at 235 basis points in December, earning a profit of some 35 million euros, the documents show.
The bank's position in CDS protected the lender from its exposure in Greek bonds but also provided it with an opportunity to play a part in the global CDS market worth some 8 billion dollars last year.
With a position totalling 950 million euros, or 1.2 billion dollars, TT had the ability to shape momentum in the speculative derivatives market which the Greek government wants to be controlled.
Prime Minister George Papandreou is among the global leaders that have been pushing for increased financial market supervision of CDS and a crackdown on market manipulation.
TT's previous CEO, Angelos Philippidis, had said in his last press conference as head of the bank last year that the swaps were part of the lender's "social role," giving it the ability to tackle speculators targetting Greece.
It is ironic that TT sold its CDS when the Greek spread stood at 235 basis points. Had they waited until January, they could have sold at the top of 396 basis points. The current spread is 337 basis points.
Prime Minister George Papandreou is likely to walk away empty-handed from an EU meeting on March 25 and 26. Papandreou had hoped to secure favorable interest rate terms for Greece's bailout, but ECB President Jean-Claude Trichet rejected such a move on Monday, supported by German Chancellor Angela Merkel, Bloomberg reports:
"There shouldn't be any subsidy element, no concessionary element" in a potential loan to Greece, Trichet told lawmakers in Brussels yesterday (ed: Monday.) Merkel said in Berlin that there's no need for European Union leaders to make any "concrete decisions" on Greek aid this week.
Conflicting signals from European capitals before the summit of EU leaders triggered three days of declines in Greek debt that pushed the yield on 10-year bonds to 6.44 percent yesterday, the highest since Feb 25. The surge in financing costs led Papandreou to say on March 19 that his country, which needs to sell about 10 billion euros ($14 billion) of bonds in coming weeks, is one step away from not being able to borrow.
Greece must finance 20 billion euros of securities maturing in April and May.
As there have been no consequences for Greece so far for defrauding the EU and the Eurozone it can be expected that Mr. Market will continue to punish the birth place of Western democracy. Unfortunately it will be as always the broad public and not the Mandarins of Greek politics who will have to bear the brunt of the Greek tragedy. I am disgusted at these signs that the EU does not honor a simple rule of justice: When you're a fraud, you're out.
If Greece gets away with it all this is an invitation for all others to start cheating too. Welcome to the 2nd dark age on the continent where power games appear to trump legality.

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