FEPS Fresh Thinking

Le Monde published an interesting article on 14/07/2011 how international hedge funds are speculating with European sovereign bonds.

They are making enormous profits with the spreads and the reevaluated nominal values. Ten years Greek bonds are available on the (second) market at 50% of the nominal value. The interest rate for these bonds is more than 15% at the moment. As hedge funds are not investing real capital but borrowing money for their speculation they will probably get the necessary capital at a slightly higher rate than the European Central Bank rate on the current market.

Indeed, what a deal for speculators: If for example you buy 1 million Euros Greek bonds (nominal), you have to spend 500.000€ in real terms at the moment. Borrowing this amount on a rate let us say of 3%, will cost you 15.000€ per year or approx.42€ a day! On the other hand, you will get 150.000€ of interest from the Greek treasury per year or approximately 415€ a day. So far you will have a daily profit of 373€. Imagine that hedge funds are not only speculating on 1 million Euros but perhaps on 10 billion Euros, subsequently they have a daily benefit of 3.730.000€!

We have to be cautious: This kind of speculation creates a new financial bubble. It seems that already a new second market is emerging similar to that of the subprime market in the US before the financial crisis. Such a highly speculative market will imply again, if not regulated, a very high level of leverage and therefore in the middle and long-term, will create huge financial instability. Indeed, the mechanism could be viable only as long as Greece is not defaulting, in which case losses would be
dramatic. Here lies the fear of Mr Trichet.

The question is: How to find a way to decrease the interest rate on Greek bonds? Are the big three international rating agencies playing a very cruel game with us? In giving lower ratings to sovereign bonds in Europe they give incentives to speculators. Hence they are responsible for creating new international financial stability risks. European leaders need to be audacious: Is it high time to regulate financial markets. It is high time to end with the supremacy of rating agencies and Wall Street bankers. It is high time to develop a financial system that serves the real economy and not only the speculators. This could be done through a larger ECB intervention or in giving new power to the European Stability Mechanism, without necessarily implying inflationary risks. If this were the case (which is not necessarily bad news in macroeconomic terms), this is again a good argument for a European finance minister in charge of regulating the links between the real economy and financial markets.

In the ‘50s courageous European leaders put together two controversial elements (coal and steel). We all know this success story. Europe and especially the European leaders have now to give emphasis to further financial and economic governance. Germany and France have always been the engine of more integration. This is no longer the case. The current leadership of France and Germany is too weak and too concentrated on daily business and their main problem of Europe, which is that they are both still thinking of Europe in the pre-Euro period.

To ensure European coherence and European macroeconomic policies we need a real European sovereign bond market. Only Euro bonds can assure European coherence and further European growth. However the ECB is a reality, the Euro is reality. The Eurozone countries cannot persist any more on national responsibilities and sovereignties in fiscal and monetary policies. This is no longer acceptable. For example, in the broader context, the EU 2020 strategy is the most prominent example of how it should not be done.

This is a precondition to overcome speculative influences and speculative bubbles.

Author :


  1. Lieber Ernst, auch das ist wieder ein guter Beitrag. Z.Zt. wird man ja gar nicht fertig mit dem Lesenvon so vielen Artikeln und Büchern, die man bekommt.

    Herzliche Grüße

  2. Ernst, I suggest you invest € 10.000 and test pour profit chances. But you run the risk of the bonds not being redeemed at 100 per cent if there will be a hair-cut.
    Eurobonds do not change the situation. There will always be different borrowers with different credit ratings. I do not share your belief in the omnipotence of governments to stop speculation. As long as human beings have engaged in buying and selling there has been speculation.
    it sounds always so nice when one sits at the screen and is furious about the huge profit possibilties. But if there were buyers the price of the bonds would go up and the profit potential go down. That is one of the reasons why Germany does not find it so sexy to have the support shield buy Greek bonds in the secondary market.
    Good luck!

  3. Dear Eberhard, yes and no. Even when there is default the speculation is worthy in the case when the speculator is selling the bond right before the hair cut. I agree that it is more than difficult to regulate speculation but leaving it as it is now is not at all a solution. Thanks very much for your comment

Comments are closed.