The real Greek tragedy

IT DEFIES sense and logic, but just three years after a failure of regulation in the global banking industry pitched the world towards an economic abyss, we are once again facing the prospect of an international crisis accelerated by the unfettered excesses of casino finance. The possibility – some would say inevitability – of Greece defaulting on its loans and being forced to leave the Eurozone is an issue that has dark portents for the world economy, threatening to undo much of the repair and recovery work achieved since the credit crunch. But what is astonishing is the extent to which some in the financial community are willing to exploit this process for narrow interest and selfish greed, to the detriment of the world economy.

At the root of the problem is something called credit-default swaps (CDS). They are a type of insurance against someone defaulting on a loan, and have become hugely popular and profitable products for traders and hedge funds as the Greek crisis has escalated. You do not have to be an actual lender to hold a CDS – anyone can buy one. Such is their popularity that there is an index of which countries are more or less likely to default at any one time. Depending on the state of this index, CDSs are bought and sold and traded. The result is that vast fortunes stand to be made if and when Greece finally succumbs. The market is worth more than $100 billion (£622bn).

This raises a number of issues. First, it may be a social faux pas to mention this in financial circles, but such behaviour is predatory, ghoulish and immoral. Such an objection may hold little sway in the impersonal world of international hedge funds, but it needs to be said. Secondly, the use of the CDS on a vast scale raises once more the failings of international financial regulation. This is not just a harmless form of betting – although it is far closer to pure gambling than most business transactions. It is a development that has a very real and damaging effect on international efforts to avoid global financial catastrophe. Because the more popular it becomes to buy insurance against Greece defaulting, the more expensive it becomes to insure against that catastrophe. This in turn alarms the bond markets, which then become less willing to buy Greek bonds. And if fewer people are buying Greek bonds, the chances of Greece securing its financial future recede. In the New York Times earlier this year a senior financier explained it rather well. “It’s like buying fire insurance on your neighbour’s house,” he said. “You create an incentive to burn down the house.”

You might have thought we had learned a lesson about issues of this sort. The global financial crisis had its roots in a similar disregard for morality and simple common sense. The sub-prime mortgage catastrophe became the global credit crunch because some bright sparks thought it would be a good idea to commodify misery. Now, it seems, the same thing is happening with sub-prime countries.

In the past few years there has been some useful work done to tighten up controls aimed at preventing a repeat of the banking crisis, placing new tests on reserves and liquidity, but the same lessons have not been applied across the financial sector more generally. International financial regulation was one of the policy objectives of the previous Westminster government but appears to have lost momentum since the Tory-led coalition took power. This is short-sighted. The tragedy unfolding in Greece, and its potential implications for the rest of the world, are surely reason enough for the world’s political leaders to put regulation once more at the top of their list of priorities.

Spivs and speculators cannot be allowed to profit by pushing Greece closer to the edge of a financial precipice, putting us all in peril.