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Top US hedge fund managers are wagering big bets against the euro and at an "idea dinner" at a private townhouse in Manhattan, earlier this month, they plotted how they could make big killings from euro woes and the Greek crisis.
The Wall Street Journal reports today that the dinner on Feb. 8th, included managers from hedge-fund titans SAC Capital Advisors LP and Soros Fund Management and participants reportedly argued about the euro falling to dollar parity. The Journal says by the week of the dinner, the size of the bearish bet against the euro had risen to record levels of 60,000 futures contracts - - the most recently available data and the highest level since 1999, according to Morgan Stanley. The data represents the volume of futures contracts that will pay off if the euro sinks to specific levels in the future.
Three days after the dinner, another wave of selling hit the euro, pushing the currency below $1.36. Within days, George Soros who reputedly made £1 billion when sterling crashed out of the European Exchange Rate Mechanism in Sept. 1992, warned in an article in the Financial Times, that the euro risks falling apart unless Eurozone member nations alter the way they tackle future debt crises.
The 2008 financial crash "revealed the flaw" in the euro's construction, Soros said, adding,"If member countries cannot take the next steps forward, the euro may fall apart."
"The Treasury need not be used to tax citizens on an everyday basis, but it needs to be available in times of crisis. When the financial system is in danger of collapsing, the central bank can provide liquidity, but only a Treasury can deal with problems of solvency ."
In related news, Ben Bernanke, chairman of the Federal Reserve said on Thursday that the central bank is looking into Goldman Sachs's role in arranging derivative schemes for Greece which enabled it to hide billions worth of euro borrowings and then bet against losses via credit default swaps (CDS).
"We are looking into a number of questions relating to Goldman Sachs and other companies and their derivatives arrangements with Greece," Bernanke told the Senate Banking Committee.
The Fed chairman said default swaps are "properly used as hedging instruments" and that "using these instruments in a way that intentionally destabilises a company or a country is counterproductive." The US Securities and Exchange Commission said it was "examining potential abuses and destabilising effects related to the use of credit default swaps and other opaque financial products and practices."
On Thursday, the Moody’s ratings agency followed Standard & Poor’s in warning that it may downgrade Greek government bonds, which would again raise the cost of public debt.
Also on Thursday, it was reported that Greece had decided to delay plans to issue a 10-year bond until next week, after the government announces a new austerity package that will provide for new spending cuts between €2 billion and €2.5 billion. The government hopes to raise €3 billion to €5 billion from the bond offering.
Greece will have to raise up to €25 billion in coming months and it has to submit a deficit plan by March 16th for approval by the Eurogroup of Eurozone finance ministers and the European Commission.
Greece has promised to lower its budget deficit from 12.7% of GDP (gross domestic product last year) in 2009 to 8.75% this year.
“Even if they bring the deficit to zero, with interest rates at 6.5% and a growth rate of zero at best, Greece’s debt ratio remains on an explosive path,”said Miranda Xafa, a former executive board member at the International Monetary Fund. “I just don’t think they can raise funds from the market now.”
Fed likely examining whether banks followed supervisory guidance on Greece debt, with CNBC's Steve Liesman; Joseph LaVorgna, chief U.S. economist at Deutsche Bank; Jim Lacamp, MacroPortfolio Advisors; and Dan Fitzpatrick, Stockmentor.com: