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04 August, 2015

How the vultures of hedge funds 'maul' the indebted states

Greece, Puerto Rico and Detroit have something else in common apart from the default

globinfo freexchange

A brutal command launched a few days ago by the holders of government bonds to a government which had issued these bonds: proceed in layoffs and sell off public property to pay us. This command reminds us something, not because it concerns Greece, but because the brutal principals are largely the same people who took advantage of the Greek debt and used invariant commands to maximize their profit.

The government which received this command is Puerto Rico and the holders of the bonds is a group of hedge funds. Among the victims of the speculative greed of this group in the past were included Argentina, Greece, and even the indebted state of Detroit in the US. The only substantial difference between the Greek and other cases is that the orders and the pressures against Greece were expressed through the "institutions" [European Commission, ECB, IMF and lately ESM] and not directly by the hedge funds.

But what exactly are the hedge funds; Officially are designated as "compensatory hedge funds." Simply put, they are investment organizations seeking high-risk investments and high returns. The funds come from large investors, who contribute significant amounts of money. The hedge funds operate with restrictions much smaller than those facing the banks and other financial companies. In fact, they are investment vultures lurking to take advantage of easy money opportunities.

Worldwide, the hedge funds have at their disposal more than 2 trillion USD: 2/3 of this sum is held by US investors. Overall, funds of hedge funds are comparable to the GDP of countries such as Britain, France, Italy, India, Russia and Canada, and four times the GDP of Argentina, or, ten times the GDP of Greece.

A common and relatively easy target of hedge funds is governments that have large debt. And that's because the market value of bonds and other financial products - through which the indebted governments are forced to seek money in the markets to meet their needs - is reduced when debt repayment chances diminish. But the nominal value of the bonds remains the same. Buying 'cheap' bonds and exerting suffocating pressure to be repurchased at prices much higher than the initial investment, the hedge funds achieve substantial profits.

For these reasons, a key target of hedge funds is the financial "junk", ie those whose market value has depreciated considerably, eg government bonds of countries that are on the verge of bankruptcy. And of course, a diabolic coincidence is that many managers of hedge funds are specialized in insolvency and bankruptcy cases.

Speculative attacks almost always follow the same tactics. An example is the recent attack on Puerto Rico, of which the economic situation has many similarities to that of Greece. The debt amounts to 72 billion dollars, with an additional 40 billion dollar pension obligations and other debts not paid: total debts amounting to about 110% of the GDP. The government is seeking the suspension of payments of government bonds, has already made significant cost cuts, and designed an economic plan in order to achieve a primary surplus in 2017.

But the vultures-investors are not interested in economic reconstruction plans, and are not touched by the increasing poverty of the population, but are aimed at direct and largest profit as possible - because this is the only reason for their existence. They require the imposition of austerity measures to collect the funds necessary to repay bonds in their possession.

Behind these speculative moves we find frequently the same "usual suspects." A total of 35 hedge funds exploit the debt of Puerto Rico: 15 of them have also exploited the debt of Argentina, 13 the debt of Greece and 7 the debt of the state of Detroit. These investors made great fortunes by exploiting state crisis and some of them vehemently fought every effort to restructure the Greek debt in 2012.

But why the governments of the developed economies have not made substantial moves to restrict the operation of speculative hedge funds; The Economist has estimated that in the UK alone, the hedge funds have donated 15 million dollars to the Conservative Party in the last five years. Similar donations of significant amounts have been made in the US, where in 2014 the Supreme Court reaffirmed its earlier decision that the donation money to parties for election campaigns is a kind of "freedom of speech".

In other words, those who are able may finance political parties, to ensure (through the funded freedom of speech) the protection of their interests. For the rest remains a "democratic" election process, through which they have the opportunity to vote for those who express the already properly configured "free speech." To prevent perpetuation of predatory speculators in such a rigged scene, the awakening of society and the information about the methods used, is immediately necessary.

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2 comments:

  1. Anonymous4/8/15 14:24

    Former IMF Official commenting on Puerto Rico: "The more the economy tanks, the less tax they collect, and the more they have to tighten. It is crazy,” he said."

    Yes, it is. Pay attention to this ultimate lesson in economics. Government is only POSSIBLE because the people produce. When the priority for resources is government, at the expense of productive INDIVIDUALS, the system FAILS.


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