Poetic injustice by Stephanie Flanders
Posted by Peter Deppisch on 03/27/2010
“First you trash our balance sheets, then you have the cheek to complain about them”. If Western governments could talk to the international financial markets, this is surely what they would say.
Think about it. First, everyone in the financial system – especially the banks and bond traders – made a lot of money using complex new financial instruments to lay bets backed by mountains of debt. Then the crisis came, and the bets turned bad, threatening to bring the global financial system with it. Governments around the advanced economies had to spend hundreds of billions of dollars propping up banks and standing behind the likes of AIG, and hundreds of billions more dealing with the global recession which the credit crunch had caused.
Now, economists and traders at some of the same financial institutions have the audacity to look shocked (shocked!) at the amount of debt which has gone onto the governments’ balance sheets. And we know they will punish them with high interest rates if the politicians don’t show how, exactly, they are going to clean up their act. Talk about poetic injustice.
Of course, no self-respecting expert would ever talk about it in such a simplistic way. They know that the institutions and investors that are now raising the alarm about sovereign debt aren’t necessarily the same ones that had to be bailed out.
The experts would also probably point out that “Western governments” and “international financial markets” can’t talk to each other, because abstract nouns can’t talk.
But I’m surprised that non-experts don’t draw the link. After all, everyone gets very upset about bankers in bailed-out institutions awarding themselves big bonuses. But the economists and bond vigilantes who complain about the scale of government borrowing could ultimately cost us all a lot more money and pain.
It was “heads I win, tails you lose” for bond markets before and during the crisis (unless, that is, you happened to hold Lehman Brothers bonds). Now the average punter would say the same thing is happening in the market for sovereign debt: or it could, if governments don’t impress the markets with their dedication to slash their deficits.
If any institution has come to embody the skewed odds for the big players it is Goldman Sachs. The New York Times has already skewered them by revealing how the investment bank had helped Greece disguise some of its debt. This week the newspaper reported how Goldmans had last summer started recommending credit default swaps to its clients, as a way of shorting sovereign debt. The article continued:
“One report said the price of swaps “may be too cheap as it may underestimate the risks to developed countries who have recently issued large amounts of debt.” “Buy C.D.S. of developed sovereigns,” the report said. Again, no countries were singled out.
Despite such advice, Goldman promptly went back to work for the Greek government. Since last September, the bank played a role in underwriting more than $33 billion of new bonds for Greece, Spain and Britain, according to data compiled by Dealogic. Those three countries are among the most heavily indebted developed nations, as measured by their debts relative to economic output.
Goldman Sachs, in a statement, said its reports merely outlined a variety of trading strategies. The bank said it saw no conflicts in its various roles.”
Here you have one arm of an institution recommending to clients, in effect, that they short debt which another arm has helped to sell.
www.bbc.co.uk
Posted by
Peter Deppisch
on 03/27/2010. Filed under
International.
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