By Sean O'Grady
Thursday, 4 March 2010
Fears of a hedge fund "conspiracy" to destroy the euro gathered pace yesterday
when the American authorities
ordered some funds not to destroy records of their trading in the single currency. The
move comes after the
US Federal Reserve promised to probe claims that the use of credit derivatives by Goldman
Sachs had, ironically,
helped Greece enter the eurozone a decade ago. Although the latest Greek austerity plan
helped to calm markets
and nudged the euro higher against the dollar, traders warned that the euro's traumas were
far from over. Indeed,
it seems that the EU and the hedge funds are about to intensify their economic warfare,
with the opening of a new
front in America.
The US Department of Justice has asked a number of the hedge funds whose executives
attended a dinner hosted
by New York-based research and brokerage firm Monness, Crespi, Hardt & Co on 8
February, to preserve
their trading histories. According to an agenda obtained by Bloomberg, those present
discussed a number of "themes",
including the chances of the euro falling against the dollar. Aaron Cowen, an executive at
SAC Capital Advisors, David
Einhorn, head of Greenlight Capital, and Don Morgan, who runs Brigade Capital Management
LLC went to the dinner,
as did a representative from Soros Fund Management.
The presence of a Soros employee has set alarm bells ringing, as George Soros' formidable
reputation as an
investor as well as a maker and breaker of currencies goes before him. So
far-reaching is his influence that
any hint from him of negative sentiment towards an asset or currency can turn into a self-
While the meeting may have been no more than an exchange of ideas, with no commitments on
the presence of so many powerful American financial interests in one room discussing the
euro will no doubt fuel
the conspiracy theories currently swirling around the foreign exchange markets and in
The Greek prime minister, George Papandreou, has condemned speculators with "ulterior
motives" for making
his country's difficulties worse and destabilising the euro. If the dinner meeting in New
York was part of a
concerted effort to move markets it might well break US anti-trust laws. Conversely, other
hedge funds have
said they have avoided euro denominated sovereign debt for fear of regulatory retaliation.
The forces are massing. The value of the "bets" made by hedge funds and others
against the European currency
has reached more than $12bn almost double the amount of a few weeks ago, suggesting
that the pressure will
persist. The number of credit default swap (CDS) contracts made to the same effect has
Many CDSs in effect a means of insuring against the risk of default have
been taken out by those with no
ownership of the underlying asset, such as Greek government bonds, in so called
"naked" CDS trading. Very
low interest rates provided by central banks have also made such bold currency plays more
viable, as they reduce
the cost of funding or "covering" them.
For the moment though, the euro seems set to survive its Greek calamity. A swingeing
programme of VAT rises
and public sector wage cuts were widely rumoured to be the price Greece will have to pay
for the long-mooted
EU bailout of around 25bn. It should also clear the way for a successful 5bn
bond issue at the end of the week.
As was widely anticipated, Athens yesterday announced a further 4.8bn in fiscal
consolidation, about 2 per cent
of GDP, in the third package in three months. There will be a rise in VAT, further tax
hikes on fuel, alcohol and
tobacco, and more reductions in the public-sector wage bill.
This is in line with the demands European finance ministers have been making on their
Yesterday's plan also had a positive effect on the cost of insuring Greek government debt,
which fell back again.
However, a further 20bn will need to be raised by Greece over April and May, and
more explicit assurances
that the other eurozone states will stand by Greece financially may be needed.
The anticipation of a deal between Athens, Brussels and the two nations liable for much of
the bill France and
Germany was also heightened by the announcement that Mr Papandreou will meet
Chancellor Merkel this
Friday before seeing President Sarkozy on Sunday. By the time Mr Papandreou faces all his
fellow EU leaders
in Brussels on 16 March he should be able to demonstrate concrete progress towards his
stated ambition of getting
Greece's near 13 per cent of GDP budget deficit down to 9 per cent next year and back
below the Lisbon Treaty
limit of 3 per cent by 2012.
However, mutual suspicion and name-calling between the hedge funds and regulators on both
sides of the Atlantic
still threatens to escalate into something more serious.
The EU's new Internal Market Commissioner, Michel Barnier, said this week that he would
investigate short sales
of the euro and the abuse of the credit default swaps market. He is currently supervising
the Commission's latest
directive to regulate the hedge fund industry, the alternative investment fund managers
This measure has the potential to kill the EU hedge fund business, which is 80 per cent
concentrated in London.
Clauses in the draft AIFM directive that require regulatory equivalence in territories
where hedge funds usually
domicile their money, such as the Cayman Islands or Jersey, would effectively end many
hedge funds' life in the
EU. And it is a substantial business. European hedge funds, predominantly in the UK, grew
by 9.1 per cent in
the second half of last year to reach $382bn, according to Hedge Fund Intelligence, part
of a global wave of
almost $2trillion, more than enough to move certain assets or currencies, especially if
leveraged with cheap
central bank money.
Lord Turner, the chairman of the Financial Services Authority said on Tuesday he backed an
short speculative positions. He said: "It may be that even if you banned it, it
wouldn't make a big difference,
but there are questions as to whether you should be allowed to take out an insurance
contract where you don't
have an insurable interest."
The French Finance Minister, Christine Lagarde, has said she wants the EU to take a united
"speculators" betting on CDSs, and the German Finance Ministry has also called
for review of "over-the-counter"
products such as CDSs, which are not traded on any central exchange and, arguably, lack
Such sabre rattling is yielding results. Some hedge funds, including Brevan Howard and
Moore Capital, have
avoided euro-denominated sovereign debt because of the threat of a "regulatory
squeeze", though they may
continue to take a position against the euro itself.
Brevan Howard, Europe's largest hedge fund, with $27bn of assets under management, has
said the short
trade in eurozone government bonds was "extended, crowded, fully pricing the
fundamentals", and indeed
the CDS spreads for Greek paper have been narrowing markedly in recent weeks. The firm
added that the
hedge funds were facing the same sort of pressure over short-selling activity that they
did at the peak of the
crisis on 2008, when they were banned temporarily in some places from going short on bank
something that had little long-term effect on the fate of the banks.
In the war between the hedgies and the authorities, many observers believe that Spain,
rather than Greece,
will prove the decisive battle ground. As Spain's economy is so much larger than that of
Greece, a bailout
would be far more difficult to fund even for the zones largest economy Germany, where
to further rescues may be insurmountable.
In the long term, the resolution of this struggle may be political rather than economic.
Mr Papandreou has
suggested speculation against individual nations would be rendered impossible if sovereign
debt was issued
by a European Treasury on behalf of all states, just as the US Treasury does. President
Sarkozy has also
spoken enthusiastically and often about the need for "European economic
But a pooling of budget and Treasury functions across the zone would remove the last
defences of German
fiscal prudence: the others have gone. The Maastricht criteria, transferred to the Lisbon
Treaty, limited budget
deficits, national debt levels and outlawed cross-border bailouts; All have been, or may
shortly be, swept away
by the financial storm. The hedge funds are, in part, betting that the German government,
or its people, will prefer
to preserve their treasured economic security rather than the cherished political project
of European unity.
As so often during momentous episodes in European history, it all depends on Berlin.
George Soros: The man that governments fear
The involvement of George Soros in the euro crisis has revived uncomfortable memories of
and profits he enjoyed by betting against the pound during the ERM crisis of 1992.
"The man who broke
the Bank of England", he was soon dubbed, and he reputedly made $1bn from his
activities then; the concern
is that he will now break the euro. The influence of the Hungarian-American currency
speculator, stock investor
and philanthropist is such that he attracts many followers, and his bets can thus become
"momentum trading". Even if he does not actually destroy the eurozone, he will
leave it badly mauled.
The auguries are not good. At the Davos World Economic Forum in January, Mr Soros declared
thought the euro "may not survive". And if there is one theme in his long career
it is that he enjoys making
one way bets on economic inevitabilities; often the certainty that a fundamentally weak
currency will have
to leave a fixed exchange rate system (as with the pound in 1992). By the spring of 1992,
it was becoming
clear that Britain was a part of the European Exchange Rate Mechanism at the wrong rate.
It was overvalued
compared to the German currency, and we were increasingly uncompetitive. The only way it
could be sustained
was for British interest rates to be kept far too high for UK domestic conditions (though
that did hammer inflation
out of the system). The pain the ERM was causing, unnecessarily, to the British economy,
was becoming unbearable.
Soros spotted his chance.
In retrospect, he followed what was an obvious strategy. In this case, he borrowed around
converted it to German marks at the fixed rate, shorting his sterling position. It was
almost a one way bet.
If sterling collapsed he would hit the jackpot. He hit the jackpot. A £350m side bet on
equities rising after the
devaluation was a bonus.
The Tory government led by John Major was humiliated for its economic incompetence, and
was left out of
contention for two decades. The political advisor to the then chancellor, Norman Lamont,
was a certain
David Cameron. One can guess the lessons he learned from the experience.
Almost 80 now, Mr Soros has been a pantomime villain ever since, but he perhaps did the UK
"Black Wednesday", 16 September 1992, heralded a savage depreciation of sterling
followed by a long period
of sustained low inflation and export-led growth. The Greeks could do a lot worse.