Some smart hedge funds have already pulled out of the crushing attack on Greece, fearing that the market logic could be ovewhelmed by political intervention, as I pointed out earlier this week.
On Thursday night Christine Lagarde raised exactly this issue on the BBC (link may not be accessible from outside the UK).
Asked what message the eurozone countries wanted to send to “speculators”, she said (my transcription):
Number one I think they had better be careful. There is clearly a statement of solidarity – we are closing ranks. Whether we are big member states or small member states we are all in this together and we are not going to let any of us down. That’s point number one.
Point number two, I think that, you know, what we are going to take away from this crisis is certainly a second look at the validity, the solidity of CDS on sovereign debt. Clearly we need to look deeply at that and propose changes.
Number three, it confirms our determination to actually bring more transparency into this equation.
Hedge funds should be concerned. CDS, credit default swaps, are widely used as a type of side bet on the security of government bonds (and other debts); Warren Buffett, among others, thinks they should be severely limited so they can be used only as insurance, not for speculation. In Friday’s FT James Rickards also called for a ban, likening the attack on Greece to a “piñata party”.
The French alone are not in a position to take regulatory action, as any crackdown – similar to the ban on shorting banks in 2008 – would need to hit Wall Street and the City of London, meaning the British and American governments would have to agree to help. (Although the French and other eurozone governments could “name and shame” – publicity-averse traders might be influenced by the fear of hate-filled locals, fuelled by cheap plonk, protesting outside the marinas hosting their yachts in the south of France or their robber baron ski chalets in the Trois Vallées.)
But Gordon Brown seems unlikely to stand up for what the Spanish have labelled especuladores in the face of demands from the eurozone countries. Barack Obama may regard Wall Street as fair game, but is less likely to see any votes in helping out the Europeans by taking on the CDS traders. On the other hand, the travails of the eurozone are bad news for US exporters – any intervention would drive up the euro, helping US exporters and reducing US imports from the eurozone. Given Obama’s new focus on jobs, that might make sense.
Either way, some of the smart money sees this as a big enough risk to avoid what would otherwise look like easy money to be made shorting the weaker eurozone members.