Monday, February 15, 2010

Spanish Intelligence Suspects Coordinated Attack on Sovereign Debt

They are learning fast.

Spanish intelligence probing debt "attacks"-report
(2/14/2010 Reuters)

"MADRID, Feb 14 (Reuters) - Spain's intelligence services are investigating the role of investors and media in debt market turbulence over the last few weeks, El Pais reported on Sunday.

"Citing unnamed sources, El Pais said the National Intelligence Centre (CNI) was looking into "speculative attacks" on Spain following the Greek debt crisis.

""The (CNI's) Economic Intelligence investigating whether investors' attacks and the aggressiveness of some Anglo-Saxon media are driven by market forces and challenges facing the Spanish economy, or whether there is something more behind this campaign," El Pais said."

Not that there's no reason to worry about Spain. On the contrary. Spain's budget deficit is 11.4% of GDP (note: US's number is 10.6% for 2010); many economists doubt the Spanish government's GDP growth projection of 3% by 2012.

Still, it is reminiscent of the "bear raids" on Bear Stearns and Lehman Brothers in 2008, both of whom collapsed under the intense attacks from certain investors taking naked long positions on the CDSs (credit default swaps) - holding only CDS without holding the underlying debt - and naked shorting of their stocks. These attacks coincided with certain media news that turned out later to be utterly false (news like "Goldman would not accept the counterparty risk of Bear Stearns", as reported by David Faber of CNBC).

The article's last paragraph indicates what kind of "attack" that the Spanish government may be investigating:

"Underscoring those doubts, the premium demanded by investors for buying Spanish rather than German government bonds ES10YT=RR has risen in recent weeks and the cost of insuring Spanish bonds against default by the government has also risen."

In other words, CDS on Spanish sovereign debt.

So who are the "investors" attacking Spain's debt? The usual suspects - Goldman Sachs, J.P.Morgan Chase, Citigroup, etc.? We can probably add Barclays and Deutsche Bank. Maybe HSBC, too. Throw in several big hedge funds, and we can't be very far from truth, can we?

But what could be their end-game? Unlike Bear Stearns and Lehman Brothers, they can't possibly bankrupt the PIIGS countries and still profit from it, can they? Or can they?

Or is it to make sure that PIIGS will be bailed out financially by Germany (who, by the way, rejected the creation of a European fund to bail out the fiscally troubled countries like PIIGS), so that they don't lose on their CDS or their cash flows?

Or is the end-game more geopolitical than just financial? Is the end-game to drain Germany economically and fiscally, by making sure the sovereign debt crisis happens and that it gets worse until Germany pays - whether by setting up a bailout fund or by gorging on the Greek imports as Financial Times' columnist and internationalist Martin Wolf urges?

If it is the last one, it could involve other parties than just greedy bankers.

Who wrote those CDSs on the sovereign debt of PIIGS anyway?


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