Hedge funds prosper while inequality thrives

The biggest ever speculative raid on any currency was launched against the euro last Wednesday, according to the Financial Times.

It was the kind of raid that George Soros undertook in 1992 against sterling, which precipitated the devaluation of that currency and its exit from the EU exchange rate mechanism.

Massive gains will be made by a few hedge fund operators in the next few months as the global financial crisis worsens. Huge profits will be made on loans to Greece, for instance, as the country will be forced to pay 2 or 3 percentage points above Germany for loans.

James Rickards of the Financial Times explained the arcane ways of making money from the misery of others. It goes like this. There are things called credit default swaps (CDS) - for instance, in relation to Greece, an insurance against default by Greece on the huge debt the state owes financial institutions.

Greater risks mean higher prices to buy the protection. Sellers of these CDS are typically pension funds looking to earn an ‘insurance’ premium, and buyers are often hedge funds looking to make a quick turn.

As Rickards explained: ‘‘In the middle, you have Goldman Sachs or another large bank booking a fat spread. Now the pi•ata party begins. Banks grab their sticks and start pounding thinly-traded Greek bonds and pushing out the spread between Greek and the benchmark German CDS price.

‘‘Step two is a call on the pension funds to put up more margin, or security, as the price has moved in favour of the buyer. The margin money is shovelled to the hedge funds, which enjoy the cash and paper profits and the 20 per cent performance fees that follow."

Meanwhile, workers in Greece will be admonished for their ‘‘immaturity’’ in failing to acknowledge the Greek financial predicament.

State debt is around 130 per cent of GDP (about the same as Ireland’s was in 1986), the fiscal deficit is around 12 per cent and the EU is insisting this be brought back under 3 per cent by 2012. A little curious, that - because Ireland has been given latitude to achieve that target by 2014.

Greece is being urged to cut public expenditure and go on a privatisation splurge to resolve its deficit problems. There will be some income tax increases, but mainly increases in Vat and cuts on pensions, public sector wages (not yet, but wait), health and education.

Greece, along with Ireland, is one of the most unequal countries in the EU. Yet nobody talks in terms of resolving the fiscal crisis by restructuring the spread of income, thereby having the rich pay for the crisis.

As in Ireland, it is simply not plausible to argue that this would undercut its capacity to resume economic growth after the recession recedes.

Denmark, France, Finland, Sweden and Germany have all had substantial economic success, while being far more equal societies than either Ireland or Greece.

It is one of the spectacular achievements of the current government, that is has been able to convince the vast proportion of the populace that there is no option but to worsen the lot of the already miserable if we are to overcome our fiscal deficit difficulties. They haven’t been able to do that yet in Greece, but are on their way to a similar success.

The current prime minister, George Papandreou, has been in office only since last October.

He won an election then, ousting the conservative prime minister, Kostas Karamanlis of the New Democracy Party.

Papandreou won by suggesting that Karamanlis would do precisely what Papandreou is now doing, ie, cutting public service wages, health, education and pensions.

Papandreou is one of a cosmopolitan elite, with safe hands. After all, he went to the London School of Economics and then Harvard, and we all understand that election promises are to be discarded immediately on coming to office.

How immature of the Greek workers not to appreciate that.

You would think that a chap called Sir Tony Atkinson, warden of Nuffield College Oxford from 1994 to 2005 and previously professor at the London School of Economics, would also be a pair of safe hands. Oddly enough, Atkinson is author of a few books on income inequality and, recently, of a commentary on an OECD report, Growing Unequal.

Atkinson has noted how ‘‘few OECD counties have reduced inequality over the last 20 years [in spite of a huge rise in prosperity]". He says: ‘‘The past five years [that was up to 2008] saw growing inequality and poverty in two thirds of OECD countries’’, and he is of the view that, with the recession, this inequality will get much worse.

‘‘It’s a case of ‘heads, the rich gain; tails, the poor lose’."

The EU is now the main driver of the ‘‘reforms’’ that will widen inequality, partly thanks to the Lisbon Treaty. Joaquin Almunia, the EU Economics and Currency Commissioner, said last week that the ‘‘reforms’’ of the Greek health service, pension entitlements and job market had to be implemented ‘‘urgently’’.

Great word, ‘‘reforms’’.

Sounds inoffensive, even innocent.

Really, it means sick people being refused healthcare, old people having their pensions slashed, hundreds of thousands losing their jobs, ‘‘urgently’’.

But thank God the hedge funds are doing nicely - for now.