Bond rulers will decide how European crisis unfolds: Kohler

That guy whose BBC interview went viral on YouTube this week, Alessio Rastani, said traders like him don’t care about the eurozone rescue plan, that he dreams of another recession and that governments don’t rule the world – Goldman Sachs rules the world.

Arresting stuff, and it has certainly made Rastani an overnight pop star. But do Goldman Sachs’ traders rule the world?
 
Well, they and other bond traders have now taken France hostage against the prospect that European politicians will try to change the Greek bond deal that was agreed back in July.
 
That deal was a good one for the Rulers Of The World. It involved Greek bond holders taking a token 21% haircut as they swap their bonds for new ones that mature in 30 years. Greek bonds have been, and still are, trading at discounts of more than 50%, so the Rulers Of The World have naturally been buying them to make a 30% profit when they swap out of them next month.
 
Meanwhile, last night the German parliament approved the measures to increase the size of the €440 billion European Financial Stability Facility rescue fund.
 
That should have been done in July but wasn’t, and the Rulers Of The World have been making it known that they’re not happy about that and have been agitating for more.
 
Since July 21, when Those Who Don’t Rule The World emerged from their meeting declaring peace in our time, financial markets have been on a wild ride: the MSCI global share index has fallen 17%, base metals 22%, commodities generally 12%, and the euro has fallen 6%. That went well.
 
So even though 80% of the German people are against putting more money into bailing out Greece, the rulers of Germany have voted overwhelmingly in favour of kicking €250 billion into the EFSF. They know who they answer to, and it ain’t the people.
 
And now there’s an incipient revolt among the cowed politicians: a few of them want to redo the terms of the July 21 bond deal, so that bondholders take more of a haircut than 21%.
 
In response, the bond markets are holding a gun at France’s head – or rather, to be accurate, at France’s banks. They’re warning that if the politicians tamper with that deal, there will be a contagion that will see the French banks locked out of both equity and bond markets. France itself would be brought down.
 
So increasing the ‘private sector involvement’ in bailing out Greece appears to be a non-starter.
 
Of the three parties involved in paying for the bankruptcy of the Greek government – the Greeks, the Germans and the lenders – the lenders get off most lightly, even though they were ones who were stupid enough to lend.
 
As to whether the Greek and German people are innocent parties being punished for the greed and incompetence of others (ie. Greek politicians and their lenders), well, look… the Greeks have been living beyond their means for a while, which has been nice for them, and the Germans have been the big winners from the establishment of the eurozone.
 
What goes around comes around, I guess. Alessio Rastani might have been shockingly amoral, but he was definitely on to something.

This article first appeared on Business Spectator