Greece part II

[Hullygully]

I would be very grateful if we could keep this about Greece, and those (two) who want to dance up and down jibing at Claig and calling her a fool and a kremlinbot and an anti-semite, start their own thread for that purpose.

Cheers

Alyosha, yes, I agree and thanks for the link. That's exactly what I think Germany is (now) doing. I wasn't terribly clear there. What stuns me is that Germany has moved so far that they are prepared to countenance the concept, never mind help things along, when before they would have pretty much gone to the stake on it. I was having a sort of "my goodness, whoever would have seen this happen" sort of moment.

And while I'm agreeing, I also think that if the Eurozone is to survive they will require that political and fiscal union - and my concern (nightmare) is that this is absolutely not an issue the politicians will be up front about. My sense is that although Eurozone voters like much of what the Euro seems to have brought with it, they don't want the EU to be a superstate run from Brussels - so there is no incentive for the politicians to be transparent.

Where I'm more confused is where I feel my affinities lie. My general view of the origin of the mess is that it is a shared responsibility.

I think it was fine for Greece to ask to join the Euro but it was not fine for Germany and its Euro pals to just let them in without long and hard thought. To the extent that long hard thinking was done, membership seems to have been granted on the grounds of political unity and amity and accord and not on the basis that the underlying numbers and actual behaviour of a country mattered.

Even at the time people laughed about the likelihood of Greece having actually met convergence criteria. No-one ever trusted the figures, so why did those making decisions convince themselves that the figures were irrelevant to the eventual outcome? (I grant you the gap between reality and appearance may have been wider than anyone suspected at the time, but it's hard to tell). Greece was a byword for bizarre and bad management (at best) so I can only imagine that the rest of the Eurozone said "come on in, the water's lovely" because they believed that however little discipline Greece had, it would (a) reap the benefits of the single market and thus get richer, promoting prosperity and "proving" the Euro was a good thing and (b) that if it did go wrong Greece was small enough not to cause any painful spillover effects to anyone else if it ran amok. In hindsight (a) was true for a while and (b) was a very bad misjudgement.

So I do feel that there is a certain amount of Eurozone responsibility owed to Greece for having been complicit in getting Greece in to the mess in the first place - or rather for having allowed Greece to get itself into that position. And there is certainly responsibility that Greece should face up to in having mishandled its affairs as badly as it did.

And, back in the EU for a moment, the free movement of people, capital and services, ended up helping the wealthier to run out of the country taking their assets with them. Those left behind are facing a very great deal of pain. If intra-European amity and support means anything, then I think the Eurozone should be a bit on the hook for agreeing debt relief and further support now.

But what kind of support and how can reforms take place? If you take funds from your fellow EU countries (especially those with the lower standards of living - ROM, BGR etc) then the recipient absolutely has to start getting its house in order and there has been a conspicuous failure for 5 years now on that front. Uncollected tax receipts are around 86% of total - I have no idea how to start remedying that in a practical sense - but it is clearly necessary.

At root whatever Greece's sins, (and to be a bit simplistic here) I don't want them treated to another Versailles, though unlike Germany I don't see strong prospects of Greece pulling itself up by its bootstraps.

Sometimes it just looks like a Shakespearean tragedy where no body is fully guilty or innocent and there are many twists and turns along the way and we all know how happily the tragedies end.

Re any private sector banks or fund managers that still own Greek Government bonds, to better explain why they have wanted to, their political thought process, and investment/risk strategy, the link below might be interesting to some.
www.bloomberg.com/news/articles/2015-07-16/i-m-a-greek-bondholder-get-me-out-of-here-says-fed-up-berliner

Furthermore a relatively simple strategy if at any time banks/fund managers bought Greek Bonds for income, would have been to buy protection via the Credit Default Swap (CDS) market, where simplistically speaking, there is a CDS derivative for every borrower, that insures the bonds against the prospects of a Default.

The CDS market itself trades bid/offer so ‘protection’ could be bought and sold as conditions change.
en.wikipedia.org/wiki/Credit_default_swap

If memory serves from the financial crash, where the CDS market worked very well limiting the losses on non government bonds for many (but took a while to to unravel by 'netting off' bought/sold positions), when the flight to government bond quality meant their prices rocketed up, but saw the likes of corporate and banks bond yields rise/prices fall – investment banks and fund managers if want exposure to a credit i.e. Ford, IBM, Rolls Royce, they could just buy its derivative CDS.

The Greek governments have to be totally to blame for their EU membership, where they saw this relatively very low interest rate, stable currency, left of centre 'gentlemans' club to good not to be a member - and they were elected to do what they consider is right for Greek citizens, the Greeks were never asked to vote for external caretakers meddling in EVERY aspect of their domestic affairs.

Greek politicians KNEW that the Eurozone was based on German financial rigour and the ECB was meant to be closer to the old German Bundesbank, than any other central bank.

Yet they entered the Eurozone without a balanced economy they never really tried to address once in, and having used the likes of Goldman Sachs to use financial engineering and structures to tart up the national books - Greek politicians knew exactly what scam they were pulling.

Yes I suspect the other Eurozone members knew this, but as a Fellowship of mindless rules & regs, they probably gave Greece the benefit of the doubt that Greece would do what it should have done to meet the entry criterion and get is lop-sided tax receipts/expenditure economy sorted out.

Absolutely Greece knew what it was doing and actively connived to get into the Euro. I agree - they were not innocents led astray. I'm not trying to argue that Greece should be absolved from its responsibility but I do think that there is more than one responsible party here.

The Eurozone might have been setting up "mindless rules and regs" but we saw how quickly France and (I think?) Germany ignored the "rules". Added to that, prior to the Euro, the main expression of EU rules was EU legislation - and the EU institutions had a lamentable track record for checking implementation, never mind enforcement or infringement procedures.

Round the start of the Euro, you really (really, really, really) should not have been drinking the Kool Aid, but plenty of people were - sign up to the rules and then go ahead and ignore them. So I keep coming back to the notion that the fellow Eurozone members (a) had no track record of ever caring if anyone else had ever delivered on the EU rules; (b) were perhaps not that picky about honouring the rules themselves; and (c) should not have but perhaps did think that mismanagement in Greece would have no dreadful effect on Greece or anyone else. I am sure the Bundesbank was having conniptions, particularly when Greece went on its spending spree backed by "German" interest rates but find it hard to credit the idea that anyone thought Greece would sort itself out and eventually meet the entry standards. It was much worse - they didn't expect Greece to shape up, they didn't care that Greece probably wouldn't and they didn't think there would be consequences. And I don't think they had any business thinking any of those things - they should have prevented Euro entry and for that I do hold them culpable.

Furthermore a relatively simple strategy if at any time banks/fund managers bought Greek Bonds for income, would have been to buy protection via the Credit Default Swap (CDS) market

I agree here too - they could have but did they? It's another area where more Kool Aid was being (unforgivably in my view) swigged.

There's an interesting snippet in BNP Paribas' 2011 annual report (page 6 if you want to download it) where it says

"For years now, many market watchers have been sounding the alarm about the excessively high level of certain European countries’ indebtedness. At the very least, the 2011 crisis showed that everyone is now fully aware of the problem.

The issues facing Greece are specific. Greece is a country whose published finances did not reflect the reality of the situation, and other European countries decided not to guarantee its debt, whereas investors long believed that they would. After lending in total confidence, the markets discovered to their cost that an EU member state and eurozone member country could potentially default."

Now I choke a little at the idea that lenders like BNPP could claim to be lending in total confidence - i.e. total confidence that the rest of the Eurozone would see them good and they were not responsible for a credit decision they would not have dreamed of when Greece was on the Drachma. But disingenuous as I think this quote is, it's what a lot of people were claiming and some of the bigger fools possibly even believed it.

And checking BNPP's consolidated financial statement for 2011 (page 46) it says

"The lack of liquidity seen during the first half of 2011 in the markets for the public debt instruments issued by these countries, plus in Greece’s case, the undertaking given by French banks at the request of the authorities not to sell their position, prompted BNP Paribas that these securities could no longer be classified as available-for-sale assets."

It's an astonishing statement, so I hope BNP was buying or had bought CDS protection because it looks as if it had promised the authorities not to off-load Greek debt and make a bad situation worse.

I can't believe that any bank still holding Greek debt today would have been asked to do so by any authority - particularly any bank that was not incorporated in the Eurozone - and if the positions are not hedged the risk managers should be shot. That said, CDS spreads on Greek debt in 2012 were so high that it would have been cheaper to make a donation to Greece rather than buy protection against Greek debt - so it also depends on when the protection was purchased.

I don't see how Greek governments are totally to blame (or where blaming gets anyone) when Goldman Sachs were in it up to their eyeballs.

It doesn't matter how healthy mortgages were outside of the basket cases. The basket cases precipitated the crisis.

The state of play in 2010:

www.theguardian.com/business/2010/feb/11/greece-debt-france-switzerland
'Analysts said banks did not usually disclose their exposure to individual countries but dismissed as misplaced concerns that Greek banks might be holding all the €300bn of debt in issuance. "Greek banks own around €40bn of the total … implying most Greek debt is sitting on the balance sheets of non-domestic banks," said Jagdeep Kalsi, an analyst at Credit Suisse.

The French bank Crédit Agricole was singled out by analysts at the research firm ­CreditSights as being particularly exposed. "It owns Emporiki Bank in Greece, which has been floundering away, and has about €23bn in loans there," Credit­Sights ­analysts said...

...If the crisis spreads to the so-called "Pigs" – Portugal, Ireland, Italy, Greece and Spain – the UK is most exposed with $3.7bn of debt, according to the BIS data used by UBS, closely followed by France and Germany. "The collective exposure of the banking systems to the Pigs is $2.9tn. The bulk of that exposure is located in the banks of France, Germany and the UK," the UBS analysts said. "The exposure is particularly concentrated in the French and German banks, which have 24% and 21% of their foreign total claims harboured in these countries. This is one reason why France and German are so quickly mentioned as countries likely to support or participate in a bailout."

www.businessinsider.com/banks-exposure-to-greek-debt-2011-9?op=1 -- banks named.

Back in April 2010, The Economist blamed Germany:
'Two weeks ago, having concluded that an eventual Greek restructuring was all but inevitable, we said Europe's leaders had “three years to save the euro”. We presumed that they would quickly get a proposed €45 billion ($60 billion) deal to stave off an imminent and chaotic Greek default, buying time for an orderly rescheduling and for the other weak economies to begin overdue structural reforms. We overestimated their common sense.

The chief culprit is Germany. All along, it has tried to have it every way—to back Greece, but to punish it for its mistakes; to support the Greek economy, but not to spend any money doing so; to treat this as just a Greek problem, when German banks and German citizens, who lend to Greece, stand to lose money too. German voters do not favour aiding Greece. But rather than explain to them why it is in Germany's interest, the chancellor, Angela Merkel, has run scared of upsetting them before a big regional election on May 9th.

Playing for time has backfired. Now the mooted rescue plan has climbed above €100 billion because no private money is available. The longer euro-zone governments dither, the more lenders doubt whether their promises to save Greece are worth anything. Each time politicians blame “speculators” (see article), investors wonder if they understand how bad things are (or indeed that investors have a choice). Euro-zone leaders initially refused to seek IMF help because it would be humiliating. Their ineptitude has done far more than their eventual decision to call in the IMF to damage the euro.'

An interesting pov.

Mathsanxiety …. Re the following on one of your posts and then your larger one looking at ‘the state of play in 2010’.

”I don't see how Greek governments are totally to blame (or where blaming gets anyone) when Goldman Sachs were in it up to their eyeballs.”

”It doesn't matter how healthy mortgages were outside of the basket cases. The basket cases precipitated the crisis.”

Firstly Goldman Sach and their expertise would have been brought in by the authorities in Greece, to do a Greek Debt ‘restructuring’ job, for which Greece would have been happy to pay a fee – there was no criminal act, no money stolen, and the fact Greece got into the EU, Goldman achieved what their CLIENT asked them to do.

As for the global mortgage lending market, there is a huge difference between the U.S. politically inspired Sub Prime mortgage lending market specifically targeted to the poor that has been around since the 1930’s (via the U.S. agencies FNMA and GNMA(?) if memory serves) that did, as you right say, precipitated the financial crash – and those better quality mortgage markets in Europe – although both securitized pools of mortgages, especially the UK, which I believe was around 50% of all mortgage lending by late 2007.

The likes of Halifax and Northern Rock were huge users of securitization to gain market share, but I’m sure I remember that Northern Rocks main ‘problem’ mortgage loans e.g the up to 110% of home value, came AFTER being under State control.

As for the 2010/2011 Greece, ‘they should have known’, may I remind people that the UK under Labour, as I can only assume Gordon “Prudent” Brown brainwashed the world due to how many times the prudent mantra was uttered, as the strong Pound was seen as either a Euro hedge or proxy, and that confidence in us saw the Pound trade up over $2.10.

Yet the UK government had gone on a approx 5% real term increase spending splurge on a fat employee/benefit State hugely increasing our governments ‘fixed costs’, FAR larger than anywhere in Europe.

Part financed by national debt, but mainly ‘covered’ by the flaky tax receipts of a huge financial bubble from highly leveraged UK banks, who due to lessened regulation, were so leveraged, it was only the UK that needed to part nationalise banks to save them.

My POINT is that the characteristics of Harry Hindsight ‘we should have known better’ is not confined to Greece, especially when considering the 2000’s boom economic environment of lower inflation, lower interest rates and an implied safe EU financial umbrella, we NOW know lulled us into a false sense of security, and took a lot of previous interest rate/credit risk , off of the Western analysts table.

HawthornLantern …. You also mention we should have known and mention BNP Paribas, but it is worth mentioning here the main functions of a bond/credit division within an Investment Bank, which generally speaking is in 3 main departments; Syndication/Origination, Institutional Trading and Institutional Sales – but lets look at the first two, but understand that WITHIN an Investment bank they always have INTERNAL risk limits, for the whole bank across all divisions, for any counterparty they deal with.

Syndication/Origination; for our purposes, this department is in contact with governments, utilities, corporations, other banks etc in the BUY side, in other words talking to potential BORROWERS, listening to their needs, and coming up with financial solutions – but even a basic new bond issue launch, could have a lot of global multi client imput/swaps behind it.

Institutional Trading; lets forget Proprietary Trading, but it is their function to maintain markets to their Institutional Clients e.g, Fund Managers with relatively tight bid/offers in government bond markets, and a core list of other corporates, banks etc, but can and would price any credit/bond issue to institutional clients asking them to bid for or offer.

The majority of their business is driven by their bank servicing their institution clients, covered by their global Institutional Sales teams, who speak to their fund management clients daily and are in the middle of the secondary market (after a new issue is launched and sold)

Now lets take the Greek government, if they want to borrow via a loan or issuing bonds, firstly that risk can be underwritten by a syndicate of investment banks, spreading the initial risk, but with a BOND issue, once launched and sold to clients their primary risk has GONE. The loan, or just a portion of it, may remain on the investment banks books, but as mentioned earlier there are several ways to Hedge that risk, often adjusted/reset as interest rate of credit worthiness conditions change.

My point here is that when a borrower like Greece, or anyone else offers the mandate competitively to a gaggle of Investment Banks competing in the same marketplace, it is NOT the job of those investment banks who do this every day of the week across every country and time zone, to get a financial CSI out and dissect the request, especially for established borrowers with a history of transactions and a credit rating from at least three Credit Rating Agencies.

And although all the Investment Banking teams above are highly professional, at the end of the day its like the Widget or any other client driven business/job, provide the best service you can filling a clients ‘buy’ order - and once that client is happy, move on to the next.

P.S. Re BNP I knew someone who worked in the bond trading room servicing clients via their sales team in the 2000's, and they ran huge trading limits, expecting their individual dealers to be plugged into the firms credit/interest rate/total bank exposure views - and position their trading book inventories long/short that way - in theory giving them a positional price edge as they didn’t want to lose competitive fund manger business.

I would find it surprising in France that political pressure could influence the likes of BNP unless they themselves were confident of the Greek credit and their bank wide exposure, but I wouldn't put in past the French - and that used to be common place in Japan a few decades ago.

Isitmebut I wonder if we are somehow crossing wires here because I don’t disagree with you (I don’t think I’ve disagreed with you all thread). And I may be guilty of being overly confusing because in terms of who should have known what, my point is that the rest of the Eurozone (governments not the banks) distrusted Greece sufficiently not to believe their figures at convergence, but still went ahead regardless. In practice this means they felt the figures did not matter or that the actual discrepancies would be manageable but did nothing to test this idea by actually doing any checking. They didn’t but they should have done – it was delinquent to have pressed ahead knowing that not everyone was really on the same page and to just hope that Greece would sort itself out when it was given no incentives to do so and had no track record whatsoever of doing so.

My point in mentioning BNP was to note that some banks (and if we believe the press, who may have looked at disclosures and done the homework) notably French, German and UK banks had a lot of Greek debt on their balance sheet which they may or may not have hedged or bought protection on – I know that they could have done this but I don’t know to what extent they actually did and to be fair I’m not actually likely to scour the financial reports to see if I can work it out.

In terms of whether the investment banks should have facilitated debt issuance by the Greek government or even, like Goldman, helped hide debt through a swap that happened to be perfectly legal under the terms of the Maastricht treaty (hence the compliance department probably didn’t worry about it) then I could hardly agree with you more. These are the functions and the business of an investment bank and it is bizarre to criticize them for performing these functions providing they stay the right side of the law. If we draw conclusions that the investment banks activities were pernicious then the response to that is to change the laws and regulations – and indeed there’s been a lot of reform since the crisis – but none of it has dreamed of attempting to stop investment banks from helping other people issue debt or even trading (less frothy trading perhaps!) or market making, but the actual functions are recognized as valid and necessary.

So I’m certainly not arguing that the financial sector should have stopped Greece and I’m sorry if I came across that way. But I do argue that any bank, investment, retail, whatever, should know the size of its exposures and when concentrations start to build up should be thinking carefully about those positions. As the BNPP snippets show, even a position is a normally liquid instrument – ie government debt – can end up sitting on your balance sheet for much longer than you might ever have imagined and costing far more than you had anticipated. And if your position is – suddenly - less liquid than you thought, then you may find that your original strategies for hedging or credit protection are either not available or the cost of them has skyrocketed.

One of the background and probably contributory factors here is that financial regulation and the thinking of some of the banks themselves meant that the EU and the Eurozone in particular could be represented as having the same risk. This is a nonsense – Germany and Greece were never an identical credit risk - but it was a passionately held view and I’ve heard it both from French regulators and board level in French banks.
However, I think, BNPP and its fellows tolerated growing levels of Greek debt on their own balance sheet due to a belief in an implicit guarantee from the governments of the Eurozone. That is certainly how I read the BNPP report comment.

In terms of how much political pressure in France played a role – I don’t suppose we’ll ever know. I think it is one of the more politically entwined banking systems but naturally it is in the banks’ interests to say that they did the authorities a favour as good EU citizens and oh look what happened… So I am inclined to think that BNPP and pals could have believed their Greek exposure was credit worthy – but as I said above, I am more inclined to think they drew this conclusion not because of any fundamental risk assessment but because they thought Greece would not be allowed to default by the Eurozone and thought they were benefitting from an implicit guarantee – the very definition of moral hazard in fact.

Isitmebut -- GS did the equivalent of stuffing everything Greece didn't want anyone to see into the closet under the stairs, in full knowledge of what they were doing. Legal or not, this was a shady piece of work. Your opinion that the likes of GS can do no wrong as long as they stay on the right side of the word legal leads you astray here.

UK banks were burned by Irish exposure, and Irish banks were exposed in the US market. You seem to imply in your posts that national borders play a role in banking and state finance. In 2008 80% of investment in Irish banks came from the UK, £140bn. European banks' exposure to the Irish crisis.

Contagion.
(And also the role of Moodys and S&P.)

'...any bank, investment, retail, whatever, should know the size of its exposures and when concentrations start to build up should be thinking carefully about those positions.' I agree.

I agree 100% with your last paragraph too, HL.

France escaped by the skin of her teeth, so far. And Britain cannot stand aloof.

claig there are several groups of left in the greek parliament and within SYRIZA. They have different ideology and tactics. Syriza has MPS that in the past were in different sectors of the 2 communist parties. 39 'left' MPs of the goverment dissented last week. So SYRIZA is a party both in the government and in the opposition. Tsipras had formed a coalition government with centre - right MPs the ANEL as well and has received support for passing laws from the opposition parties.

MariscallRoad, yes you are right.

What is happening now in Syriza? Is it holding together? Will there be a split? Will Tsipras be able to hold his position?

A professors thinks the government won't last long and that new elections will be needed soon.

"The new government will probably last “a maximum of two months,” Hatzis said by phone Saturday. “The only way out is elections.”

www.bloomberg.com/news/articles/2015-07-19/greek-banks-to-open-monday-as-tsipras-prepares-for-another-vote

Hi Claig. At present Syriza has and no further defections. I will post if I see anything serious. They have 149 - 39 dissenters + 13 MPs of ANEL a centre right party and this is sufficient for granting confidence. the latter promised support and kept it. The Opposition parties, 70 centre right (not the extreme) + 17 socialists and 17 left / liberals promised to vote for any laws Alexis wants because they say they put 'national interest' first. They kept promise.

Note that those opposition leaders had met in Brussells the other EU leaders (francois) after SYRIZA deffections were published and so in the summit every head of state knew Tsipras would get support from his opposition anyway.

It is whispered about elections soon but it is not realistic because there will be bailout final details discussions and a vote which will last several weeks. So altogether the opposition and government promised to hold till the final laws and all promised to vote them. The capital controls cause one billion euros damage each week.

Merkel today agreed that restructuring of debt can follow after the details of bailout are finalised and she said 'new terms' must be agreed. It is mentioned payment deferment for decades. The issues however with this is that an interest rate needs to agreed, new conditions brought in and the collaterals assessed.

I had studied the contracts that Greece had made with Multinationals and Individuals in 1950s and 60s but they pale to insignificance compared with what is agreed with the creditors now. Greeks reacted to the kind of MN Investment in the past because it had caused a budget and GDP deficit and the state had to borrow excessively. The reason for deficits were the heavy subsidies of utilities electricity, communications water, sewage, irreversible envirodamage and costs to make infrastructure such as dams ports airports roads train track etc all paid by the state. The terms for assets exploitation of the creditors now have no time or other limits, it can be under or over ground and the Greek laws from now on including justice laws have to be approved by the EU Institutions. It all happened in 17 hours. The PM had gone into the summit meeting without having prepared a plan B is said. if you want to ask me more post here please.

Thanks, MariscallRoad. Good to hear some facts from on the ground out there.

Hi claig again. I live in London with family and try to keep in touch with relatives there. Syriza still has lead in ratings. People have seen several politicians over time.

This article may interest you it is about aspects of Greece to return to drachma. It is one opinion. There is also another view that staying with either currency will have same risk been exposed to speculators and is not certain would reduce debt. I cannot see any signs of the left umbrella breaking. The issue that needs to be seriously tackled is debt restructuring and almost all agree it is so. So there several options, such as longer repayment but 'haircut' is not allowed by treaty.

www.cesifo-group.de/ifoHome/presse/Pressemitteilungen/Pressemitteilungen-Archiv/2015/Q3/pm_20150706-griechenland.html

I just bought from Amazon a book by J E Stieglitz 'Creating a Learmning Society, new Approach to Growth Development and Social Progress' Have not read it yet.

Keep posting plese and PM me if you wish.

HawthornLatern …. Excuse me, I do realise that we do agree on most things, but when it comes to governments and their elected responsibilities and competence, rumour has it I get on my soapbox and go into one at any opportunity – especially if the UK government, mathsanxiety please take note.

Now as you appear to know how investment banks generally work in assessing risk, I believe that you will understand that if an investment bank KNOWS a bond borrower/credit and its market, they will sell it from their own inventory when a bond is expensive, buy it is when its cheap – which I guess is why U.S. Investment Banks Lehman and Bear Sterns went to the wall, as they were market making ‘experts’ in the securitized bond markets, especially Mortgages.

Where the macho and time proven trading mentality would have been ‘if I liked that bond at a price of 98, thought it was cheap at 92, I need to fill my boots at a price of 85 – but Mortgage bond prices kept falling.

So for the likes of French bank BNP and probable instructions to hold on to Greek Bonds, as I mentioned before, depending on what price they bought them e.g. on market dips, if managing their risk correctly they could have had a win double – appearing compliant to their government providing overall cash liquidity to their banking system AND made a lot of money out of it.

As even if NOT deemed ‘creditworthy’, whether using hedging strategies like buying a Credit Default Swap Greek government protection to perfectly match the Greek bonds ‘creditworthiness’ they owned, or hedging their exposure within the bond markets using a LESS ‘creditworthy name at the time, say being LONG Greece government, SHORT Portugal government.

The point is that investment banks RARELY run large/risky ‘naked’ positions of being net LONG or net SHORT, unless very sure the prices will go their way, and they never can be, even into government economic data releases they predict right as markets can ‘buy or sell on the fact’.

BNP/Paribas (due to the latter of the merged banks) used to use and offer clients some of the best risk/credit analysis in the market, and I suspect that soon after the financial crash began in late 2007, they realised that the whole Eurozone governments yield ‘convergence’ story that began in the late 1990’s, was starting to unravel and flashing 'Danger Will Robinson' lol.

mathsanxiety ….. your last post appears to keep wanting to lash out at banks, especially Goldman Sachs restructuring Greek debt as asked by the Greek government as if the Greek government was never complicit and at me, suggesting that I think that the UK government ran a tight banking ship.

Firstly even Greece’s fans are realising that Greek governments are incompetent when myopically pursing their objectives, getting in or staying in the Eurozone.

”Greece debt crisis:Economist Paul Krugman admits he 'overestimated the competence of the Greek government'
www.independent.co.uk/news/business/greece-debt-crisis-live-nobel-prize-winning-economist-paul-krugman-admits-he-overestimated-the-competence-of-the-greek-government-10401092.html

”Paul Krugman, a Nobel Prize winning economist, issued his verdict on the way the Greek government handled the eurozone crisis and found he may have "overestimated the competence of the Greek government."

”In an interview with CNN, Krugman said that it didn’t even occur to him that Greece would make a stand against its European lenders without having made a plan for an exit from the euro if things went wrong.”

Next in the UK, I was possibly the UK governments biggest critic for initially thinking that a U.S. policy to gradually repeal all of the Glass-Steagall Act of 1933 by the late 1990’s, meant for some unknown reason, that the UK had to plan to do the same.

So by taking away sole banking supervision away from the Bank of England in 1997, forming a new tripartite of UK regulators to include the UK Treasury and a new Financial Services Authority (FSA) that the government controlled – and telling the FSA to lighten UK banking regulation as UK bank leverage/lending was increasing dramatically.

metro.co.uk/2011/04/11/gordon-brown-i-made-big-mistake-on-banks-before-financial-crisis-650630/

www.theguardian.com/business/2011/dec/12/labour-regulations-city-rbs-collapse

The Labour government did not CAUSE our financial crash, but due to their lighter financial regulation and resulting UK credit/debt explosion, it not only initially made our recession/budget deficit worse, but also made our recovery harder.

Governments have to be held solely responsible for their own POLICY mistakes, whether in Greece employing the brightest of the Wall Street bright Goldman Sach to financially engineer (read cook) their national books to meet their Eurozone entry criterion, or the UK government, thinking that they can harness the most overt form of UK capitalism to build, pay for, and maintain - a fat, welfare and benefit dependent, UK State.

So BOTH governments had what they though were good ‘social’ intentions, but both screwed the pooch, so ultimately their own citizens via ‘austerity’ - only far, far, worse in Greece.

Isitmebut If the point is that the investment banks only take major positions if very, very sure of themselves, then I agree – in principle. My argument on BNPP’s Greek position is that politics and risk fundamentals seem to have been a bit muddled up with each other. Given that I expect the likes of BNPP to be more than averagely astute and have any number of instruments and strategies at hand to protect themselves or to make a profit then, finding that they took a bath on Greece leads to the question… why.

At end-2011, BNPP had a net profit of 5.1bn Euros – a profit that might have been more than 50% higher had it not been for the small matter of its declared loss on its Greek debt holdings of 3.2bn Euros. I’m not uncharitably guessing that the 3.2bn loss was attributable to Greece – it’s in the financial statement. Greece wasn’t hedged. It wasn’t close to being hedged so BNPP absolutely needed a narrative for its stakeholders to ensure it wasn’t punished, retrospectively, in the market and the narrative BNPP presents is around the expectations of behaviour in the Eurozone.

If we argue that the market prices risks, I agree, it does and often does so well, but on this occasion not so great.

My version of looking for a culprit/ smoking gun goes something like this.

There’s the politics gun. If BNPP thought implicit government guarantees were in place so that no Eurozone government debt would be allowed to default, then it’s perfectly rational to let chunks of Greek debt sit on the balance sheet as if they were as liquid, fungible and creditworthy as German or US debt.

There’s the regulatory gun. Greek government debt wasn’t exactly any old debt, it was sovereign debt and that cuts you a break in regulation. EU banking regulations allowed EU banks (didn’t force them mind you, but gave them the option) to treat any EU sovereign debt, (France, Germany, UK, Sweden, Greece, Ireland, Italy, Portugal, Spain…etc ), as risk free, zero risk. In capital terms you can run up a lot of leverage if you have a zero risk asset. I doubt very much an exposure to any Greek corporate was looked at in remotely the same way as the sovereign exposure. In any case there was no clear incentive to be cautious about Greece in the regulations – we couldn’t rely on the official regulatory dashboard to be flashing amber.

There’s the quality of management gun and this, I think broadly boils down to the “what do the numbers tell us so far” and “what do we think is going to happen” conversations that you expect any half competent board to have. Irrespective of what the risk departments were up to, the Board should have had a conscious view here.

For the numbers half of this conversation, I would not dream of arguing that BNPP and chums lacked the intellectual firepower to analyse the living daylights of the financials of Greece. I also hope they were monitoring their position – it would have been inexcusable not to – but strictly speaking country risk monitoring wasn’t required by EU financial legislation and as we saw in the aftermath of the crisis there were many major banks running all sorts of concentrated positions that they had hardly noticed themselves build up. Broadly speaking, country risk wasn’t supposed to be a risk at this stage – cross border investment and transfers were easy and encouraged and well, systems to monitor data points we don’t have to worry about are expensive. And added to all this, if regulators didn’t make you hold capital against any sovereign risk you happened to have acquired then incentives to monitor dwindled yet further. Regulators – globally – were very inconsistent in what they did and did not insist upon in terms of concentration monitoring. So BNPP were bright but there’s a chance they were not looking as closely as they might and could have made some rooky errors in risk management – and even if they did make mistakes they could still have been no worse than middle of the pack in terms of peer performance – risk managers were being ignored all over the place.

And that brings us to the “what’s going to happen in Greece” part of the management conversation …and that I think takes us back to the politics gun and moral hazard. I don’t think it was at all irrational for banks – and I would argue potentially French and German banks in particular - to assume there would be no losses and that fellow Eurozone governments would step in to protect the Euro project. In France of all countries, it seems plausible that Euro conviction might run high. Maybe not as prudent an attitude as it might have been but not irrational or stupid and that’s where the mispricing and scale of exposure crept in.

But all this boils down to is that I think moral hazard was at work and that the political view trumped a more sober risk assessment based on more conventional analysis. Greece outside of the Euro would never have posed such a risk as BNPP et al would never have discounted the downside risks so heavily. But they didn’t think they were betting on Greece, they thought they were betting on the Eurozone and it turns out that we are still trying to work out the rules of the Eurozone.

HawthornLantern ... re your "At end-2011, BNPP had a net profit of 5.1bn Euros – a profit that might have been more than 50% higher had it not been for the small matter of its declared loss on its Greek debt holdings of 3.2bn Euros. I’m not uncharitably guessing that the 3.2bn loss was attributable to Greece – it’s in the financial statement. Greece wasn’t hedged."

The 'killer point' my friend, as someone who tends to debate to death on the facts, I have to both acknowledge and accept that you are correct on your main EU risk mistake, assumptions.

Got it.

Isitmebut I could probably have saved time all round if I'd just quoted the figures from the off!