Financial Stability News

Flashing news about financial stability and central banking

Hedge funds bet against eurozone – again

While unemployment is heading for 25 % in Spain, the FT report today (Hedge funds get against eurozone) that hedge funds are now betting against the core euro countries as well. With Hollande predicted to win the election in France and German growth weakening, Poulson and the other big macro funds are taking directional bets against the key euro bonds, including the German Bunds. A bet against Germany is currently “cheap”, since the cost of hedging the credit risk through a CDS is “only” 86 basis points compared with 660 bp for Spain.

For how long can this game go on, with euro countries imposing austerity to please the markets, just to be undercut with additional speculation? S&P’s downgrade last week of Spain shows that there is not much reward to be gained from austerity programs. And as Marin Wolf observed in the FT today: small contractions bring recessions and big contractions bring depressions. “Since a large number of countries are expected to tighten their fiscal positions substantially in coming years, their economies are likely to contract. How long the political glue will hold in these circumstances is a really interesting question.”

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