The Slog analyses why he still thinks the Greek debt deal will never fly

This last week represented one hell of a learning curve for me. Some days, it’s been like having a minor walk-on role in a Le Carre novel where nobody knows the ending. I’m only now beginning to make some kind of sense out of it…but at times, it’s still like lassoing ether. Indeed, one of the major differences between blogging and grown-up Establishment journalism is that the former are more likely to share what my Dad used to call their “workings out”. It does seem to me that it is all-important in the MSM to be seen as an all-knowing, ultra-reliable source of information….no matter how often that inside-track is shown to be wrong. Whereas we upstart pro-ams – having little to lose – present the four-dimensional long-division for inspection. (We are, after all, expected to be off-the-wall).

Two things are reasonably clear. First, when geopolitical forces loosely cooperate to get a result, for loose cooperation read hidden back-stabbing and sabotage of even the most well-meaning of promises – by person or persons largely unknown. And second, when unimaginable amounts of money and power are at stake, the absolute need to win the propaganda battle – as a form of self-fulfilling or denying prophecy – creates a battlefield where the weapons are nastier than anything you’d find in a physical war. We talk of nuclear wars, cyber wars and currency wars, but media wars outstrip anything thus far created. That is a sobering realisation…at least, it has been for me. And I speak as one who studied Nazi propaganda as a special topic at University some 44 years ago.

The range and depth of disinformation is staggering, but there are patterns of it. For example, the range of figures I’ve been given for the size of Hedge Fund Greek bond exposure ranges from $10bn to $60bn. Even allowing for the fact that Hedge Funds make the Mafia look blabber-mouthed by comparison, it surely can’t be hard for the IIF and the ECB to tot up what they hold, ask the Greeks how much they issued – and then assume the missing bit is down among the Hedgerows. (Most banks will have kept a record of what they sold to the Funds anyway).

But the fact is, it is in the Eurocrats’ interest to portray the Hedge Funds as a hugely powerful and psychopathic wolf-pack destroying all their best-laid plans; and it is in the Hedgies’ interest to suggest that their power is overstated by the media. A Hedge Fund’s primary strategy is stealth, and their end-games usually involve the element of surprise.

“Nobody has paid much attention to the Hedge Fund bondholders, because they tend not to engage,” said one senior European wealth manager yesterday, “but the professionals like Monti and Draghi will be worried. Here we are about to do a deal, and a huge portion of the creditor base hasn’t even said it might cooperate on the haircut issue. It’s a no-brainer that if you hold out and claim the insurance, then it clearly isn’t voluntary PSI, and so it’s obviously a default”.

“We think no more than 10 billion [euros of Greek debt] is owned by Hedge Funds,” said a leading UK sector spokesperson yesterday, “bear in mind, the total under Hedge Fund control worldwide is only the same as the capitalisation of  medium-sized bank.”

I’ve no idea what medium-sized bank that person had in mind, but it’s not one I know of. Fine, the sector has reduced from its 2008 peak of $4trillion, but both the sector reports delivered since mid 2010 show a total under management of around $2 trillion. There is also an important qualitative element here: hedge funds have become more ‘legit’ than they were. In 2008, only 44% of their backers were institutional; today, that figure is 61%. These folks are under pressure here: they’re not just going to walk away having calmly made a whopping loss.

At the time of the October deal, the Bankfurt Maulwurf said categorically that the IIF would not be able to deliver its members to sign the agreement. He was right then, and he thinks Dalloran’s tepid approval for the deal is a preface to failure again. Once you start to tot it up, friends, the number of insitutions with the potential not to take a voluntary haircut is pretty terrifying.

Then there are the endless conspiracy theories. On Tuesday and Wednesday I was given information suggesting that my sources concerning an alleged ‘default timetable’ were wrong: that the ratings agencies had been nobbled (that’s why Draghi felt safe doing the separate ECB bond-swap) that Schauble had been blackmailed into shutting up, and that this would be the Brave New World of State debt: ‘there is no such thing as a default unless we say so…and we are never going to say so’.

It’s a theory, but it doesn’t stack up: if that view was recognised, every sovereign bondholder in the eurozone would clamour for the exit. I have no doubt that some information sources are in denial about Greece being in default, but that’s because they have no choice (eg Evangelos Venizelos) or because they are stupid (eg Jose Barroso). By lunchtime yesterday, Fitch had blown a large hole in the theory by declaring a technical default, and Moody’s confirmed to The Slog that it too was mulling ‘a development’ of its view on the D-word.

More credible (but still uncertain) is that the ECB’s boss Mario Draghi has decided to tough out the ratings agency verdicts: ‘it’s an opinion, and we have a different opinion’. He, after all, doesn’t care much about big US insurers catching a cold – that’s their problem. So the hedge funds get a result, so what? It’s not his money: taking this view merely solves a capital debt problem for the Italian…and passes it on to a reluctant Wall Street.

However, that potentially leaves The Slog with holes in its own version of what’s going to happen between now and, roughly, the end of March. If, for instance, there is a ‘plan’ for Greece to default, why does Brussels still occasionally go into overdrive about the catastrophic consequences of default?

I think there are two reasons for that: first, the other ClubMeds have to sign up to the belief system. Make it OK to default, and they’ll all do it. (This is, I think, the flaw in the ‘Draghi doesn’t care about the ratings’ view: sooner or later, chicken licken’s sky will be seen not to have fallen in, and all cooperation with the ESM and IMF could cease immediately.)

The second reason splits into two parts as I see them. The first comprises useful idiots like the newly-unelected Herman van Rompuy who simply aren’t in the loop. They’re there to have their windey mechanisms renewed, and potter about the place saying doom-end of world-children in slavery. The second reflects the fact that not everyone is on board with ‘the plan’. There’s a very good chance that such players include – to quote an abnormally large exception – Angela Merkel the Chancellor of Germany…although there is clear evidence that she is bending on the issue of default in Athens.

It’s very likely that the French President in turn isn’t a signee, because he perhaps still has at least one bank to worry about. But he might be: I simply don’t know for sure – and I doubt if he’d tell me. However, I rather fancy that Mario Draghi’s bold card-playing suggests that the major eurobanks have been sorted. Ultimately, I doubt if anyone knows that for sure: but I do find it funny to hear Brussels Sprouts saying ‘default is not a problem’ one day, and ‘default is the HNR51 virus reborn’ the next. In a world of 24/7 ‘news’, you don’t need to worry about the veracity of your soundbite: half an hour later twenty new ones will have erased it from the popular memory.

Geopolitical plans are by definition based on false hubris. They very rarely come to fruition, and events change both the aim and the game along the way. I think this ‘default plan’ will fail, because you can’t ‘amputate and cauterise’ a fissile substance – and because things in the pipeline will render its aims irrelevent. (See yesterdays Slogpost on the subject).

For now, I’m sticking with my view of what the plan is or was: an attempt at, if you like, at constructing  a planned firewall. It is designed to protect the US, help Obama get reelected, and shelter Germany from interim debt liability prior to FiskalUnion.

Far from being ‘a consipracy theory’, the corroborated allegations still stand, and the actions of the players fully support them: Christine Lagarde is reversing away from involvement like an Italian tank, the German track record of seemingly senseless hurdles to unseat the Greeks is blatantly obvious, the ratings agencies probably haven’t been bought off, and all the poison pills remain.

This deal will not make it to the tape. On verra.

Related: When a deal is not a deal

                   Good game, Mario – but you can’t win