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Selling the Greeks short

Date: March 12, 2010

Last night I was watching Newsnight and Jeremy Paxman was interviewing a hedge fund manager who was shorting Greek government bonds and also the leader of the Danish socialist party. Naturally, the Danish socialist leader was complaining about “speculators” driving down the Greek bond market and causing misery for Greek citizens whose government would now have to pay more to service their debts and so have less cash for services. What surprised me was the response of the hedge fund manager who seemed to justify his position on Greek bonds in political terms. He also seemed to have little answer to the consequences of his successful “speculation” in terms of ordinary people having to pay more. 

It struck me that in the hysteria of the debate no one pointed out the obvious.

If you want to buy something, you need to have a seller and if you want to sell something, you need to have a buyer.

If there are no buyers the sellers are stuck with an illiquid asset. Similarly, if there are no sellers you can never buy the asset you want at any price.

If the Greek government wants to sell bonds, it must have buyers and short of ordering people to buy their bonds at gunpoint, you would have thought that it is in the interest of the Greek government to make their bonds appear as attractive as possible as an investment. One of those attractions must be the ability to sell the bond at a given price in a market. If the Greek government behaves in such a manner that buyers demand a bigger discount to compensate them for the increased risk of default that is a buyer’s privilege and the fault of the Greek government.

The locust hedge fund manager who shorts Greek bonds is simply taking a view that buyers will pay less for the bonds in due course. For every buyer there is a seller and so there might be another locust hedge fund manager who has decided to profit from over-sold Greek bonds and goes long on them. This is a market and we don’t hear governments complaining about them when investors are willing to buy their debt in happy times.

Is it so hard to explain to the ordinary man in the street that having buyers and sellers in a market is of great benefit to us all? Liquidity is clearly something that too many people (Politicians) take for granted as some right they have rather than the greatest invention of the Free Market (as opposed to the “buy my bonds or else” market). A short seller doesn’t cause a market price to fall, it is the absence of willing buyers that makes the price drop and when the price has dropped enough the buyers come back.

We need better and more eloquent advocates for the free market.

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