As Greece stabilizes financially and as Greek debt instruments increase in value, there are frequent articles like this one extolling the success of hedge funds which have benefited from the Greek tragedy. As much as I mistrust hedge funds and pure financial investors as possible creators of an economic turn-around, I think a clarification is in order before one concludes that hedge and/or vulture funds exploit the impoverished local tax payers.
If a hedge fund purchased Greek paper when it was trading at 14% and sold it when it was trading at 50%, the fund made a ton of money but that ton of money did not come out of the pockets of impoverished tax payers. Instead, it came out of the pockets of those who had purchased that paper at 100% and now sold it at 50%. Theoretically, Greek tax payers themselves could have made that ton of money: Greece would have had to obtain enough financing to re-purchase all of its debt at 14%. However, chances are that there wouldn't have been enough sellers at 14%.
Now, what happens if vulture funds à la Argentina buy the Greek paper at 14% but don't sell it in the market at 50% but, instead, wait for final maturity and insist on getting paid 100%? Again, Greek tax payers don't pay more than the amount of debt which they had originally contracted. The difference is that they cannot benefit from the haircut which other creditors were willing (or had been forced) to accept. Still, that could be interpreted as 'exploiting impoverished tax payers' because when the majority of creditors agrees to a debt restructuring involving debt relief, they do so because they recognize that they cannot get their money back from impoverished tax payers. If a minority does not go along and succeeds in getting paid 100% in the end, they have taken their profits from impoverished tax payers and not from 'the market'.
If a hedge fund purchased Greek paper when it was trading at 14% and sold it when it was trading at 50%, the fund made a ton of money but that ton of money did not come out of the pockets of impoverished tax payers. Instead, it came out of the pockets of those who had purchased that paper at 100% and now sold it at 50%. Theoretically, Greek tax payers themselves could have made that ton of money: Greece would have had to obtain enough financing to re-purchase all of its debt at 14%. However, chances are that there wouldn't have been enough sellers at 14%.
Now, what happens if vulture funds à la Argentina buy the Greek paper at 14% but don't sell it in the market at 50% but, instead, wait for final maturity and insist on getting paid 100%? Again, Greek tax payers don't pay more than the amount of debt which they had originally contracted. The difference is that they cannot benefit from the haircut which other creditors were willing (or had been forced) to accept. Still, that could be interpreted as 'exploiting impoverished tax payers' because when the majority of creditors agrees to a debt restructuring involving debt relief, they do so because they recognize that they cannot get their money back from impoverished tax payers. If a minority does not go along and succeeds in getting paid 100% in the end, they have taken their profits from impoverished tax payers and not from 'the market'.
Decisions now Klaus about Argentina?
ReplyDeleteIf i was in Argentinians position i would do exactly the same.
This last moment i would make publicly a proposal giving the most they wanted in hedge funds eg (80-90%). If they denied they will stay with last denial.
Judge Griesa role was not productive.This is not capitalism.
MS